1031 Exchange Advisor - Certified Exchange Specialist® - CRE Broker, Investor, Exchangor - I nerd out over real estate, investing, taxes and deal structuring
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Joined November 2022
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Example of how incredibly complex a 1031 exchange can be: (but also effective)
⭐️Starting with the Drop & Swap
I had a client with 3 properties.
All owned in 3 different entities with different partners in each one.
Buyer came along who wanted to buy all 3 properties in 1 transaction.
Client was the GP and had a tremendous gain.
My client wanted to 1031 but not all of the partners wanted to.
I organized 3 drop and swaps to get the client into 2 exchange-able entities for themself, and another exchange-able entity for another partner who was going their own direction in a 1031. We also got the rest of their LPs their cash back at close.
⭐️1031 Start, Surprise Addition, and TIC Identification
Client was pro-active, they started sending LOIs before they even closed, smart🧠. They were in DD before the clock started.
When closing happened and the 1031 timeline started, the client was already several days into DD on some very viable replacements.
The client added a little complexity to the deal because they had a friend who also was in a separate 1031 exchange they wanted to partner with. Surprise.
When it came down to the 45th day, we had some very solid prospects, but also wanted to leave some options open.
We ended up identifying under the 200% rule for everything, 2 separate identifications for the client on their 2 entities, and we matched a few of those up on a 3rd identification for the other new 1031.
Each designation notice had 9-11 different properties on them with various percentage ownership interests designated for each one. Meaning the client needed to TIC in "themself" with their separate entities together and also consider the outside party's interests from the other 1031 exchange. It was a lot of calculations to make sure it was all correct, but this was all possible through a Tenant in Common structure. The TIC percentages also helped us abide by the 200% rule since you only apply the % interest in the purchase value to the total % of replacement value in identification.
⭐️Replacements and Final Result
When the dust began to settle and some of the properties fell out, the client ended up parking 99% of their debt on some of the identified properties (nice little seller finance deal) and used the rest of their cash to buy another property free and clear. These were not on market deals, they were found and created through an exchangor network. The client did not overpay because they structured a TIC or underpay because they got a seller finance deal. The structure doesn't dictate overpaying or underpaying. It was about compliance, tax deferral, and yield. I promise you the exchanger got way better than a 6% CAP (double digits). The seller of the upleg properties also got what they wanted too. The other 1031 partner was able to get a totally separate deal with another cash TIC investor which my client was able to get a piece of as well.
The result was a successful 1031 exchange for the client. They broke up a GP/LP structure and consolidated entities, cash, and debt. They are off the clock, tax deferred, and can now more easily 1031 exchange again in the future. Future exchanges won't have to happen all at the same time and they will have less moving pieces when they do. Their friend had a simple and straight forward 1031 exchange sliding in as a TIC on a one-to-one exchange with my client.
1031s don't automatically mean you overpay. I find most people who "overpay" think they must find the ONE replacement property that is going to a be perfect fit. They often don't find it, or find something close enough and "have" to have it. This often results in failure or "overpaying". Most successful 1031s are just getting you to the next step, a better position than you were in, so that you can be prepared to go to an even better position a couple years later. They transact, they compound, then exchange again.
Structure accordingly.
1031 Exchanges have been around for over 100 years, since 1921.
They were SIMULTANEOUS ONLY until the 1980s. And they were very rarely 2 party transactions, they often involved 3 or more.
Let me give you a quick example:
Farmer Brown has a 100 acre farm he's owned and operated since birth, he knows no other life. His nearby hometown is booming and rapidly becoming a city. A developer comes by and says he'll pay $1M CASH to Farm Brown for his 100 acres. While Mr. Brown can retire on that money, he likes farming, knows no other way of life, and wants to keep doing so. It's a family business afterall.
So Farmer Brown accepts the offer contingent on being able to find a suitable replacement property. He looks 20 miles down the road and sees that Farmer Green is looking to sell his 300 acre farm for $850k. Farmer Brown offers to buy it cash, contingent on a 1031 exchange with a simultaneous closing. Farmer Green agrees.
So both Farmer Brown and Farmer Green are in agreement and waiting on contract for Mr. Developer to bring the money to buy Mr. Brown's farm which is actually going to Mr. Green to buy his farm on behalf of Farmer Brown.
When Mr. Developer brings the money and closes, he gets a deed to Mr. Brown's 100 acres. Most of that cash passes through Mr. Brown's hands and go straight to Mr. Green who gives his title to Farmer Brown. Mr. Brown did a title for title swap, so he did a 1031 exchange and is mostly tax deferred. He also ended up with an extra $150,000 as "boot", which is income from the sale of his property and he pays taxes on that.
There was no qualified intermediary in these days, the closing/title office or the other parties in the transaction acted as the intermediary by holding the title and cash until it could all be closed on one day to record the 1031 exchange.
Seems tedious, but it was actually quite effective. There was never a "failed" 1031 exchange. Either you found your replacement, didn't sell, or just decided to take the cash and pay the tax.
Simultaneous exchanges are still done today with great effect. It often takes a bit of counseling to help someone understand how this is done, but once they do, the smart ones start to see the bonuses.
-More assurance of tax deferral
-Higher velocity of ROI/money
Exchange accordingly.
There's lots of ways to make money in real estate.
Get rich in your niche.
You go broke trying to play everyone else's game...
9/10ths of the law is possession right?
I'm not an attorney so I don't know.
But I do know that 9/10ths of the 1031 tax code is intent.
Exchange accordingly.
They turned down $92M for a piece of dirt.
And that saved their 1031.
A story on who is a real estate dealer, and who is a real estate investor
(And it matters bc it can save you like $9.5M in tax)
To be frank, you can almost just consider this purely a thought experiment.
In 2013, an LLC buys raw land in Dublin, CA for $28.25M.
The members' management company starts the entitlement work.
And, that same year, someone offers $92M.
More than 3x what they paid. In the same year🤯
They say no🤯 (but they just wanted to see the market)
In 2014, they list it for six months. Nobody bites.
In 2015, they sell the whole thing in one bulk sale to a Toll Brothers affiliate for $99.5M.
And they do it as a 1031. (The best move in the Wild West of real estate)
The FTB looked at that and saw a developer
Entitlements. A listing. A homebuilder buyer.
And that matters, because a 1031 doesn't care what you did with the property.
It cares why you held it.
Property held primarily for sale is dealer property. It doesn't get an exchange (§1031(a)(2)(A)).
So the FTB said they had to recognize about $63.7M of gain.
The taxpayer went to the California Office of Tax Appeals.
And won. Reversed in full
(Appeals of Moller Contra Costa RE Investors, LLC, 2026-OTA-526).
The FTB didn't attack the intermediary, the identifications, or the timing.
The only question was intent.
So what carried it?
That $92M "no" definitely did a lot of the work.
Dealers sell when the price is right. Investors tend to wait.
They never subdivided, built, or sold a single lot.
And, it was one bulk sale, not a stream of sales.
And the value came from the market (local values were up about 70%), NOT from their development work.
Now, the fair part.
This wasn't a slam dunk.
OTA said having no improvements isn't enough on its own (Buono, 74 T.C. 187, fn. 11).
The entitlement work pushed them toward dealer.
If you get audited, the paper is your argument.
An operating agreement that says the entity holds for investment. (Which, they had)
Emails showing you turned down offers.
Separate entities for the land you develop and the land you hold.
A clear record of who did the entitlement work, and why.
A few honest caveats.
This is nonprecedential.
So, it’s just a fun exercise on if you’re a developer or investor
If you flip or develop for a living, the bar is higher, and some deals won't qualify no matter how you paper them.
If you're holding property and a 1031 is somewhere in the plan, I’d recommend reading your operating agreement today.
Just one more reason I'm overjoyed to be in this region and always looking to add more brokers/principals to the network to help everyone take advantage of the growth.
What does it make me for buying a used truck for my business as a write off and it also makes me money?
Hybrid 1031 Exchange Example #1
Forward + Reverse
Bob has 10 Single Family Rentals worth $2.5M and wants to roll them all into a single tenant NNN lease property.
He doesn't want to sell them as a portfolio at a discount, even though that would be a simpler 1031 for him. He wants maximum value.
So Bob sells 1 SFR and starts the 1031 forward exchange with that. Over the next few weeks is able to sell 4 more SFRs and roll them into the same forward exchange. He also finds a $2.5M replacement NNN property during this time that he likes and moves forward with the purchase as his replacement.
Problem : the rest of the houses haven't sold yet and he wants to put all of his houses into this 1 property free and clear and tax deferred. He is running out of time and he does not want to do another forward exchange into another property.
Since Bob has a good exchange advisor, they decide to set up a hybrid exchange.
Bob buys 50% of the replacement property as a TIC and his advisor buys the other 50% with an EAT entity. This closing ends Bob's forward exchange with his first 5 properties and starts a reverse exchange for him at the same time. This gives Bob another 180 days to sell his remaining 5 houses and place that equity into this property tax deferred.
Everything goes well and Bob is able to sell his remaining 5 SFRs in a few months time. Those funds are transferred to the EAT and the EAT is transferred to Bob.
Bob now owns zero single family rentals and 100% of a NNN lease property like he wanted, free and clear and tax deferred.
Technically Bob could have had 360 calendar days to do this, 180 days for the forward half and 180 days for the reverse half. Two separate exchanges but just one exchanger.
A hybrid 1031 is not 1 type of exchange, it's 2 together. It is scenario dependent, not property dependent. Nor can you just say I want to do a hybrid exchange to try and get 360 days for your 1031.
Exchange accordingly.
Example #2
xitter.cf/NathanDWebb/status/211…
Hybrid 1031 Exchange Example #2
Reverse + Forward
Jim is a real estate investor with multiple commercial properties and is always looking for the next great deal.
He happens to find an off market vacant warehouse deal for $5M and he has a tenant he knows he can put in there and easily double the value but he needs to act quickly.
He would like to 1031 into this deal with one of his other properties but he can't wait for one of them to sell so he can buy this deal. He knows he can do a reverse exchange on this deal however and elects to do so.
He makes an offer and gets the warehouse under contract. He calls his exchange advisor to set up an EAT to park the property and they both prepare to close it. Jim also prepares to sell one of his other properties to exchange into this one, but knows that may take time and he needs to close fast on this warehouse deal to seal it.
Jim is able to close on the warehouse deal in 60 days and was unable to sell anything during that time but does have some property listed with interested buyers. Jim's reverse exchange clock is ticking now since the warehouse deal closed with the EAT and now he needs to sell something, he has 180 days to do so and remain within safe harbor guidelines. He was able to get the tenant into the newly purchased warehouse during this time however and that project couldn't be going any better.
After a few months, Jim gets an all cash, quick close offer on his $10M office building. That's more than his reverse exchange amount but he's going to take it because his reverse clock is ticking, it was already identified in his reverse exchange documents, and it's a great offer. Jim's going for it.
Jim elects to do a 1031 exchange on the office building. It closes quickly just like the offer said and Jim enters into a forward exchange. Immediately he sends $5M of the proceeds to the warehouse EAT to close out the reverse exchange. Done.
Problem : His forward 1031 exchange still has $5M of value he needs to use to be fully tax deferred on his $10M relinquished value total... He also has about 180 days to do it now though, because his reverse exchange was on a separate timeline and just got closed out.
Jim finds another deal valued at $7M and while it's not a stellar deal like the warehouse, it works for him. He gets a loan for the difference and closes it out within 180 days.
Result : Jim is fully tax deferred on his $10M office building sale. He got a stellar $5M deal done as a reverse and a good $7M deal as a forward exchange. Technically Jim could have had 360 days to do these deals, 180 for the reverse and 180 for the forward. It took less total time than that and each exchange timeline lasted less than 180 days each. Those "technical" 360 days do not overlap.
The reason this became a hybrid 1031 exchange and not just a reverse is because the office building was much higher value than the warehouse he had parked in the EAT and he needed to use up all of his office building value to be fully tax deferred on the sale of that building.
If Jim had only purchased the warehouse as a reverse and not purchased any additional property, he would have owed tax on the unreplaced value. I.E. "boot". Depending on his tax basis, the reverse 1031 alone may have resulted in zero taxes deferred. Alternatively if Jim had sold a smaller property he had instead of his office building, say one valued at $4M, he could have just closed out the reverse exchange and not needed to extend into a hybrid 1031 with a forward exchange.
Again, hybrid 1031 exchanges are situation dependent and always involve multiple properties and are never just 1 to 1.
Exchange accordingly.
Hybrid 1031 Exchange Example #2
Reverse + Forward
Jim is a real estate investor with multiple commercial properties and is always looking for the next great deal.
He happens to find an off market vacant warehouse deal for $5M and he has a tenant he knows he can put in there and easily double the value but he needs to act quickly.
He would like to 1031 into this deal with one of his other properties but he can't wait for one of them to sell so he can buy this deal. He knows he can do a reverse exchange on this deal however and elects to do so.
He makes an offer and gets the warehouse under contract. He calls his exchange advisor to set up an EAT to park the property and they both prepare to close it. Jim also prepares to sell one of his other properties to exchange into this one, but knows that may take time and he needs to close fast on this warehouse deal to seal it.
Jim is able to close on the warehouse deal in 60 days and was unable to sell anything during that time but does have some property listed with interested buyers. Jim's reverse exchange clock is ticking now since the warehouse deal closed with the EAT and now he needs to sell something, he has 180 days to do so and remain within safe harbor guidelines. He was able to get the tenant into the newly purchased warehouse during this time however and that project couldn't be going any better.
After a few months, Jim gets an all cash, quick close offer on his $10M office building. That's more than his reverse exchange amount but he's going to take it because his reverse clock is ticking, it was already identified in his reverse exchange documents, and it's a great offer. Jim's going for it.
Jim elects to do a 1031 exchange on the office building. It closes quickly just like the offer said and Jim enters into a forward exchange. Immediately he sends $5M of the proceeds to the warehouse EAT to close out the reverse exchange. Done.
Problem : His forward 1031 exchange still has $5M of value he needs to use to be fully tax deferred on his $10M relinquished value total... He also has about 180 days to do it now though, because his reverse exchange was on a separate timeline and just got closed out.
Jim finds another deal valued at $7M and while it's not a stellar deal like the warehouse, it works for him. He gets a loan for the difference and closes it out within 180 days.
Result : Jim is fully tax deferred on his $10M office building sale. He got a stellar $5M deal done as a reverse and a good $7M deal as a forward exchange. Technically Jim could have had 360 days to do these deals, 180 for the reverse and 180 for the forward. It took less total time than that and each exchange timeline lasted less than 180 days each. Those "technical" 360 days do not overlap.
The reason this became a hybrid 1031 exchange and not just a reverse is because the office building was much higher value than the warehouse he had parked in the EAT and he needed to use up all of his office building value to be fully tax deferred on the sale of that building.
If Jim had only purchased the warehouse as a reverse and not purchased any additional property, he would have owed tax on the unreplaced value. I.E. "boot". Depending on his tax basis, the reverse 1031 alone may have resulted in zero taxes deferred. Alternatively if Jim had sold a smaller property he had instead of his office building, say one valued at $4M, he could have just closed out the reverse exchange and not needed to extend into a hybrid 1031 with a forward exchange.
Again, hybrid 1031 exchanges are situation dependent and always involve multiple properties and are never just 1 to 1.
Exchange accordingly.
Example #1
xitter.cf/NathanDWebb/status/211…
Hybrid 1031 Exchange Example #1
Forward + Reverse
Bob has 10 Single Family Rentals worth $2.5M and wants to roll them all into a single tenant NNN lease property.
He doesn't want to sell them as a portfolio at a discount, even though that would be a simpler 1031 for him. He wants maximum value.
So Bob sells 1 SFR and starts the 1031 forward exchange with that. Over the next few weeks is able to sell 4 more SFRs and roll them into the same forward exchange. He also finds a $2.5M replacement NNN property during this time that he likes and moves forward with the purchase as his replacement.
Problem : the rest of the houses haven't sold yet and he wants to put all of his houses into this 1 property free and clear and tax deferred. He is running out of time and he does not want to do another forward exchange into another property.
Since Bob has a good exchange advisor, they decide to set up a hybrid exchange.
Bob buys 50% of the replacement property as a TIC and his advisor buys the other 50% with an EAT entity. This closing ends Bob's forward exchange with his first 5 properties and starts a reverse exchange for him at the same time. This gives Bob another 180 days to sell his remaining 5 houses and place that equity into this property tax deferred.
Everything goes well and Bob is able to sell his remaining 5 SFRs in a few months time. Those funds are transferred to the EAT and the EAT is transferred to Bob.
Bob now owns zero single family rentals and 100% of a NNN lease property like he wanted, free and clear and tax deferred.
Technically Bob could have had 360 calendar days to do this, 180 days for the forward half and 180 days for the reverse half. Two separate exchanges but just one exchanger.
A hybrid 1031 is not 1 type of exchange, it's 2 together. It is scenario dependent, not property dependent. Nor can you just say I want to do a hybrid exchange to try and get 360 days for your 1031.
Exchange accordingly.
Forward 1031 : Sell the relinquished property today, buy the replacement property later.
Reverse 1031 : Park the replacement property you want in an EAT to buy later when the relinquished property sells.
Hybrid 1031 : Put the two together. Forward to Reverse or Reverse to Forward.
Hybrid Requirements : You need more than just 1 relinquished and 1 replacement property. You can only utilize this structure if you're buying more than 1 property with 1 relinquished OR selling more than 1 property and buying 1 replacement.
I had a client today look at using a hybrid 1031 (reverse and forward together) off of a TIC option just so he can buy what he needs today and spider web into a couple properties tax deferred, all just to corner a specific off-market property and tenant.
This is how you 1031.
Had a Realtor ask me about DST (Delaware Statutory Trusts) today and if I knew they were the right choice for their client.
I told them I know quite a bit about DSTs and disclosed I'm not a rep, advisor, or broker for them, but I can help explain it to them in layman's terms.
DSTs are like a vehicle (they are a SPV allowing for 1031s, but lets stick to the vehicle analogy cuz REALTORS®) but they are not a sports car, luxury sedan, or SUV.
They're a bus.
They hold a lot of people, they go from point A to point B, not very fast, you don't have to drive, and you'll probably want to bring your own snacks cause it'll be awhile. There are no stops along the way, you can't get off whenever you want, and there is still a possibility the bus breaks down. (the underlying asset is still real estate and the debt, equity, tenant, therein can still go south and a DST ain't no side of the road fix, nor is there another bus coming you can just hop into, just ask 2008)
Ultimately that bus is most likely going to get you to point B sometime (5, 7 or 10 years later), and that place is probably a bus depot. That bus depot might even have some transfer opportunities. (1031 to another bus, cab, or your buddy is picking you up in his turbo 'vette. Maybe you even decide to pay the tax and walk home.)
That depot might also be the end of the line (read your PPM docs carefully) and your only option is getting funneled onto a cruise ship (721 UPREIT) and sailing the 7 seas for an undisclosed period of time.
Also the cruise ship might be royal caribbean, it might be carnival. I'm not a cruise ship kinda guy so I don't know which is which, I just know that you get what you pay for and it was included in the bus ticket. You get the ship the bus drops you off at.
You'll have some chill days on the boat, catch some vibes for sure, the cruise ships still run into stormy seas though (market shifts), and they also stop at ports (partial exits by selling operating units), but by and large you are very much along for the ride.
Can cruise ships still sink (REITs fail)? Sure, but it's rare. It's way more common for them to lose a bunch of value and the ride get a lot less fun the longer you're on it. The boat you get off of is likely not the same condition you got onto it in.
Yes, I'm talking about both cruise ships and REITs.
In the end, I told the Realtor I couldn't say if a DST was right for them or not. It all depends on where they're going and how they want to get there. A bus and cruise ship might be exactly what they want and need.
I told the them that they probably shouldn't be trying to offer bus tickets when they're not authorized to sell them either, even if just to get a commission on a property sale. Leave that to the bus ticket salesman. Disclose that DSTs are a viable 1031 option, terms and conditions may apply, to read the fine print, and refer them to a bus ticket salesman if you know of one.
Do not refer them to me. I don't sell bus tickets. I can hold their hand as they step onto one if that's what they need. You call me when you need to step into a turbo' vette or a private limousine. I can help with that.
Exchange Accordingly.
Nathan Webb retweeted
Real estate Milton Friedman:
With inflation the good effects come first.
Your asset values go up, what you can sell products for goes up.
But then the inflation settles into daily life expenses.
If you are a landlord your value went up and your rent went up some, but your expenses went up more. So you are worth more but your cash flow went down.
If you are a fix and flipper your material costs go up, your labor costs go up, but you're selling price caps out. So you get squeezed on your margins and you bought your land too expensive 6 months ago before the inflation.
If you are a note holder from a bunch of seller financed properties note values go down because interest rates get pushed up. So your discounted value is less.
If you are an option holder on a long-term option at a fixed price you have no expenses. Your value is higher and you have no real inflation costs. It's a one-sided deal.
If you hold a Master lease that says you pay the owner $300 a month per door on a multifamily property but they pay the taxes and insurance and maintenance. You keep all the upside on rents and you take on none of the expenses.
Sometimes contracts are better than ownership.
#retwit
#realestate
#inflation
Nathan Webb retweeted
Real estate exchangors are those people ya see doing creative deals.
What they do can look intimidating.
But I've found it to be a stellar collection of collaborative folks, many of whom are willing to share strategies & lift up new people who are motivated to learn and apply the skills.
I suspect they do that in part because these types of deals by their nature often are more complex and require a more collaborative counterparty than a traditional real estate transaction, so the field tends to attract bright, collaboration-minded people.
But I suspect they also recognize that the more people there are who understand exchanging & creative deal structures, the more opportunities get brought to the community in general.
And if they help you, the more likely you are to bring deals to them specifically.
Very cool alignment of incentives.
The result is that it's common for folks in the field to have a mentor. In fact, you can often track chains of mentors that go back decades.
So if you want to learn, find a deal. Bring it to someone in the creative field you like. Maybe they buy it, maybe they don't. Either way you'll probably get some feedback. (And if you don't get feedback, try someone else.)
Use the feedback to bring them a better deal. Rinse, repeat, learn, apply, grow...and eventually continue the chain & share what you know with the next crop of exchangors.
Offer him $50k, he can have a 30 yr option to buy it back for that price subject to a 10 yr lockout.
Rent the place out and collect the cash flow. Let's pretend I net $1,500/mo after expenses and maintenance.
What's my yield if he buys it back in 10 years?
What's my yield if it was a $150k purchase and buyback?
Brokers, if you're going to insist on putting out a property as 'unpriced', do not be surprised if I send you an overpriced offer with 'undisclosed' terms.
Hint: it's gonna be a 100 year mortgage
Bought to have 55+ brokers, investors, and principals from the region all in the same room doing deals together.
IYKYK
Cost Segregation should not be referred to as the Lazy 1031.
It should be referred to as the 1245 Recapture Trap.
Don't walk into it if you don't know how to walk out of it.
To keep it simple and unspecific.
1031 Exchange 🟰real property ➡️ real property tax deferred exchange
721 Exchange 🟰 real property ➡️personal property tax deferred exchange
Drop & Swap 🟰 personal property ➡️ real property transfer so that you can 1031 exchange
If you want to go from LP shares in one deal tax deferred to LP shares in another deal, you'll most likely have to:
1⃣ Drop & Swap 💸💸💸
2⃣1031 Exchange 💸
3⃣721 Exchange 💸💸
Attorneys are expensive, and the fees to do tax deferral property can add up to be more than your tax liability if your situation is complicated.
Love the partners in your deal and never plan to separate? Good, partner up on the LLC/GP/LP level. You'll never need to drop & swap if you're always together.
Not sure about your partners in the deal and maybe just want to stay in this deal for a few years and go your own way after? There's better ways to structure the deal than a partnership...