How 1031 Exchanges Can Grow a Property Management Business (Even if You Don’t Do Real Estate Sales)

Today we’re joined by Eric P. Hoglund, Broker (DRE #01420325) with Estey Real Estate & Property Management. He explains the benefit of understanding 1031 exchanges for property management companies, even if your company doesn’t do real estate. After doing a lot of traveling with the Navy, Eric decided he wanted to be closer to home so he could raise his kids and be with his family. His wife’s family had owned a property management company since 1946, and he began learning everything he could about the real estate and property management industry. Eric knows that getting your real estate license doesn’t mean you know anything really important about real estate. Terms like ‘escrow’ sound scary, even to professional agents, and there are lots of acronyms. When he closed on his first home, he was a licensed agent but still felt outside of the loop. The entire process made him nervous, and that allowed him to think about how his clients and his owners felt during this process. He sees his mission as demystifying things for his clients. Currently, he’s managing around 300 properties and his company does between 15 and 20 million in sales. Why do we have Eric here today as a guest on The Property Management Show? Because we’re talking about 1031 Exchanges, and that’s one of those terms that might need to be demystified. It’s a term that gets thrown around a lot. Everyone is aware that it exists, but not everyone is clear on what it is. Defining a 1031 Exchange The tax code scares people right away. But, a 1031 Exchange is not as complicated as people think. It’s simply a way to defer taxes. This exchange is a way to move gains that you’ve earned on one property into a new property that you’d like to purchase. Here’s an example. Let’s say you bought a home years ago for $100,000, and you just sold it for $200,000. That’s a gain of $100,000, and it’s taxable. But, if you take that $100,000 and put it into another property, you can defer those taxes. You need to buy a like property, but that isn’t as restrictive as you might think. It simply means you have to buy another income-producing property. So, you can sell a condo and buy a fourplex. For a while, everyone wanted to own a winery. It’s possible to sell a rental property to buy a vineyard. One thing you need to know is that you never actually see that gain from the property you sold. The money immediately goes into an exchange holding company, and you’ll pay some fees. So, it moves from one escrow account to another. Many investors find this is a great way to do business, especially when you don’t overcomplicate it. Some investors, for example, want to take their $100,000 gain and only roll $70,000 into the next property while keeping $30,000. It’s possible to do that, but you’ll have to pay your tax on that $30,000. The 1031 Exchange isn’t mystical, but if you don’t know the rules, it’s easy to get into trouble. There are some timelines that are important: 1. From the time you close on escrow with the house you’re selling, you have 45 days to designate up to three different properties for your next purchase. You don’t have to close on those; you simply have to demonstrate that you’re moving towards a purchase. 2. You have 180 days after your first sale to close escrow on your purchase. So that’s six months. After that, you cannot leave the money there indefinitely. If it looks like you’re not going to close within those 180 days, get your tax expert involved. When you finally liquidate and get out of the income producing property business, you’ll have to pay those taxes. But, the 1031 Exchange is a great way to stay in the business even when you’re ready to sell an investment. It’s hard to escape taxes forever, but you can minimize what you pay. This is similar to what happens when someone inherits a property.