1031 Exchange Hack: Avoid Tax Pitfalls with Parking Transactions

by | Jul 24, 2024

Unlock the secrets to maximizing your real estate investments with 1031 exchanges! In this enlightening video, we delve into a strategic approach known as the “1031 parking transaction.” Discover how this method not only boosts your negotiating leverage but also ensures a tax-deferred exchange, providing you with peace of mind. Learn about the critical rules of 1031 exchanges, the common pitfalls investors face, and how employing a parking transaction can dramatically shift the power back into your hands during negotiations.

Whether you’re a seasoned investor or new to the real estate game, this video is packed with insights that will change the way you approach property investments. Don’t let tight deadlines and market pressures dictate your investment choices. Instead, learn how to use 1031 exchanges strategically to enhance your portfolio’s value and secure your financial future.

If you’re considering selling a property or are curious about how 1031 exchanges can benefit you, this video is a must-watch. Join Stephen Morris, real estate CPA, as he guides you through the process, step by step, and reveals how to use exchange accommodation title holders (EATs) to your advantage. Say goodbye to rushed decisions and hello to savvy investing.

Click the video link below to watch the presentation and always feel free to reach out to us.

YouTube video

Transcript of Video:

Hey everyone. So today we’re going to talk a little bit about 1031 exchanges and one particular strategy that you can use to improve your negotiating leverage and also give you peace of mind in achieving a tax deferred exchange. So what is this exactly? Well, everyone knows about the 1031 exchange, especially in the real estate world. We love 1031 exchanges because in this scenario, you can sell a property for a substantial gain. And as long as you follow a certain set of rules and procedures, you can defer and ultimately avoid that gain through the power of using a 1031 exchange. However, the rules that you have to follow in order to be successful are quite strict. So let’s talk about those rules and how they also have problems and that they can be solved with a particular strategy. Okay, so what are the rules around the 1031 exchange? Well, there’s two primary rules that we’re going to focus on here and it’s related to timing. The first is, upon the sale or disposition of your property, you have 45 days to identify a new property to buy and 180 days to close on that property. Generally speaking, 180 days is not problematic for buying properties. You know, it’s six months. Most deals get done in 30 to 60 days. That’s generally not going to be an issue for you. It’s the 45 days which is going to be a dramatic problem for you. And so if you think about the timing, you sell a property on, let’s say December 31st, and then you’ve got all the way up till February 14th to figure out what your next property is going to be. So what ends up happening? You maybe magically in the first week after the disposition find a property, you open up escrow, you do your investigation, you take a look at the condition of the property, you do your market analysis, and it just didn’t work out that well for you. It’s not a very good opportunity. You gotta back out of the deal. Well, that took you 20 days to figure it out. You’ve got 25 days to identify another property. It’s a tight investment market. Sellers aren’t really letting go of their properties. There’s like three more deals out there. They don’t look that great, but you gotta do something because if you don’t identify in 45 days, congratulations, you’ve got a huge tax bill on your hand from the property you just disposed of. So what ends up happening? You’ll take anything that comes along your way. You make an investment decision solely driven on taxes, and you basically handed all the power and negotiation to the seller. That’s a big problem. And I gotta tell you, we’ve been on the other side of this before where we’ve had buyers come to us and they would tell us, “Here’s the offer. We wanna buy your property.” I’m like, “Yeah, that’s great. We’ll get back to you in maybe a week once we’ve thought about it.” And their response is, “No, I’ve only got three days to identify this property, otherwise I’m blowing my exchange.”  What do you think our response is to a potential buyer like that? Our price has gone up. Because guess what? We’ve got ‘em by the thumbscrews here. Most people when they’re doing a 1031 exchange kind of follow this pattern. They sell and then they frantically look to buy something else. That new buy is just not going to be a very good investment deal for them, and they’re doing this solely to avoid taxes. But what if I told you that there’s actually a way to avoid all of this? – Please go on. – The way we’re going to avoid this is to use something called a parking transaction. And the way it works mechanically is something along these lines here. And I’m going to show a slide here which kind of shows the flow of the entire transaction so that you can get a feel for what it’s all about. But the core of it is this. Let’s say, for example, you identified a property that you want to buy and that you’re going to hold onto and eventually you would love to exchange into this property. You also simultaneously have a property that you’ve owned for many years which has significant appreciation and you would like to dispose of this property. Well, my recommendation instead is buy that property, but the buyer is not going to be you. – What is that? How does that work? How does that work? – It’s going to be a third party which we use as an exchange accommodation title holder or an EAT. And it’s basically a service that you’re paying for. But how is the buyer going to get the financing? Well, you’re going to loan it all the money it needs. If it needs acquisition financing from the bank, you can guarantee that loan, you can provide the property management to it, do any development work, any repairs can be contracted to you. Oh, and also I should mention that the title holder may not convey property to anyone else in the entire universe except for you. – Pleasure doing business with you. – So after you’ve completed the acquisition and you find yourself ready to sell, you go ahead and you sell it to a third party, close escrow, funds are now in your accommodator’s account. And guess which property you’re going to identify within your 45 day window to be the 1031 up like? The property that’s held by the EAT because the EAT is forced to sell to you. This completely eliminates all the risk around whether or not you’re going to successfully identify an investment opportunity within the 45 days. You can comfortably take your time and also be able to achieve your investment objective by identifying this particular property that you bought through the EAT prior to your disposition of the property that you were looking to relinquish. – Oh, dodged that bullet. – So this is a very powerful strategy. The only downside I would say to doing this is you need enough money to buy that second property first. The property that’s held by the EAT, you need to have enough funds to do it. Most people when they’re buying properties, they need the proceeds from the sale of their relinquished property to buy the replacement property. It’s a much better long-term strategy to build enough capital to be able to buy the replacement property first, then sell your relinquished property afterwards, thus completing with 100% certainty a very successful 1031 exchange. So the cost of not doing that is you’re going to overpay for all your properties in the future, 10, 15, 20%, whatever the market might bear at that particular time. And so for the long run, you’re going to lose that money anyway, so why not build it up in the future and build this long-term plan towards always having successful 1031 exchange parking transactions. So with that in mind, if you have any more questions or you’d like to know a little bit more about how these 1031 parking exchanges work, or if you’re in the middle of considering selling a property, let us know, contact us over here, and we’ll be more than happy to assist you with your 1031 exchange and get you into a proper parking transaction. Thanks so much for joining and look forward to seeing you in the next video.