Episode 196:
In this episode of The Mentor Podcast, Ron LeGrand sits down with Ashley Romiti, president of GCA 1031, to break down the 1031 exchange: how to sell an investment property, buy another, and defer the taxes, over and over. Ashley explains the three taxes it defers, the 45- and 180-day deadlines, and the identification rules. Ron shares his strategy for turning one house into three, and Ashley explains why the costliest mistake is waiting until after you’ve sold to start planning.
Topics Discussed:
- What a 1031 exchange is. Under IRS code section 1031, you can sell one investment property and buy another while deferring the taxes. For example, sell a single-family home and buy a duplex or fourplex.
- The three taxes it defers: capital gains tax (state and federal), depreciation recapture, and net investment income tax.
- “Swap till you drop.” Keep exchanging from one property into the next for as long as you like. Your heirs get a step-up in basis when you die. You only pay the deferred taxes, at long-term capital gains rates, if you take the cash out.
- What counts as “like-kind.” Any property held for investment or business use: rental houses, multifamily, land, hotels, commercial buildings, DSTs and more.
- You can never touch the money. A qualified intermediary (QI or accommodator) must be in place before you close. The sale proceeds go straight to the QI, then on to the replacement property.
- The deadlines. You have 45 days after the sale to identify replacement properties in writing to your QI, and 180 days to close on them. Miss the deadline and you pay the taxes.
- The identification rules. Three-property rule: up to three properties of any value. 200% rule: any number of properties, as long as they total no more than twice the sale price. 95% rule: any number, but you must close on 95% of them. Ashley has never seen it used.
- Ron’s strategy: one house into three. Use the exchange money as down payments on several owner-financed houses, then put lease-option tenant-buyers in them to multiply both your assets and your income.
- Retiring? Consider a DST. Investors tired of being landlords can exchange into Delaware Statutory Trusts: large, professionally managed properties ($50–100 million) that pay projected monthly income.
- Plan before you sell. The most common call Ashley gets comes after an investor has already closed and taken the money, which is too late.
- Vet your intermediary. The QI industry is largely unregulated. Choose a big, bonded firm, ideally bank-backed, and ask how it holds client funds.
- Seller-financed notes and audits. Exchanging when you take back a note is tricky, so ask your QI. Ashley hasn’t seen exchanges trigger audits, though very large exchanges get more attention.
- Get professional advice first. As Ron puts it, it’s much easier to avoid the mess than to clean it up.
Resources:
- Connect with Ashley Romiti and learn more about 1031 exchanges and DSTs — GCA1031.com
- Training, tools, and information to help you get started and keep moving forward — RonLeGrand.com
- Learn Ron’s proven system for buying houses without using your cash or credit at the Quick Start Real Estate School
- Get Ron’s free book and learn the foundational strategies every real estate investor needs — Claim Your Free Book
- Our NEW Closers Club membership with, DREAMS (CRM), CMA Tool, 100s of lesson videos and more – Ron LeGrand’s Closers Club