1031 Exchange Solutions for Investment Property Owners with Kyle Shimoda

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Interview Transcription

ADRIENNE:
Welcome back. And thanks for listening to the Team Lally Real Estate show home of the guaranteed sold program or we’ll buy it. I’m Adrienne and I’m Attilio and if you have any questions, you can give us a call at 7999596 or check us out online at Teamlally.com.

ATTILIO:
Our guest today was born on Oahu yet raised on the island of Kauai since he was three years old. He graduated from Kauai High School and attended the University of Hawaii with a major in Marketing and minor in finance and got a certificate in the culinary arts from Kapiolani Community College. He moved to Oahu in 1999. He is currently a Wealth Advisor at INPAC Wealth Solutions for the past 18 years. He has been assisting individuals, families and businesses build a financial plan for their future as well as reach their personal and family goals. Please welcome today’s guests Kyle Shimoda. Kyle, are you there? Hello, like I want to say like Hello, like Lemony Snicket it Hello, hello. Hello.

KYLE:
I love how you added in the number tree and yeah, in the description.

ATTILIO:
That’s it. So, you know, like so. You went to Kauai Hi. Kauai because get Kauai and Kapaa high right?

KYLE:
Kapaa Kapaa Kauai Yeah. Some people say Kauai was a Kawaii?

ATTILIO:
Yeah. And my dad’s a graduate of Kapaa High School and him and his brother, my uncle Jimmy. They went there. They were raised by the OG ers was like Hanai family and that I’m big. They’re like, I don’t know, couple 100 acres and they had cows and everything. So used to get up. They got to go do chores like on a farm, and then go school, and then come home and do even more chores riding horses, you know castrating cows. I mean, they were like full on cowboys in high school. Because my grandfather, their father was a businessman in Honolulu. And he was a widower, so he couldn’t take care of my dad and uncle Jimmy. And so they got raised by the OG er family on Kauai and grew up there. And then after high school, they went came to BYU out in Laie, but that’s how, Wow, I

KYLE:
did not know that. Yeah,

ATTILIO:
that’s the history of the Leonardo he’s on. I remember when time went over there, and then my cousin was teaching me out on ride on dirt bike and almost, I almost crashed into an barbed wire fence. But that’s another story. But you know, and my sister lived there for a long time. She was there for hurricane Iniki. Were you? Were you there for hurricane Iniki? You must have been a

KYLE:
I was there for hurricane Iniki. Yeah, what tell you what data was? Yeah, it was a very, for me. What I realized as a kid looking back when that happened, the first thing I thought about was great. No school. Yeah. Now as a adult, as I go through this in a homeowner, and they’re the hurricane warning like, Okay, well, we got to we got to tape up the windows, we got to come get some gas, the backup of water it’s it’s such a different experience as an adult going through a potential hurricane versus as a kid, which is fun game.

ATTILIO:
As an adult. You’re like, we need 50 cases of bottled water and more toilet paper that we’re going to use in our entire lifetime. As one kid like, ah, house, no more roof, but at least I don’t have to go to school. All right. So let’s talk about people’s future. Right. I feel like you’re going to share you like the information you share with people is going to help them be the ants. Or the grasshopper you remember that fable right? The answer? Could you refresh my memory on that? It was summertime. And the grasshoppers all kicking back, cruising, sleeping on his mom’s couch. No, my job. And then the ants. They got like three jobs, working all the time saving. And then when economic calamity hits the grasshopper doesn’t have any reserves or savings or anything to fall back upon. But the ants have saved up. But I mean, in the story, it was wintertime. And so winter, the winter of our lives is when we get older. We don’t want to work till we drop dead unless you Jimmy Buffett because that’s what happened to him. He you know, he’s on billionaire Jimmy Buffett.

ADRIENNE:
But he and he enjoyed what he was doing. Yeah.

ATTILIO:
It was funny because his songs is all about kicking back and cruising and shots of tequila and all of that. But he like wrote books. He had Margaritaville restaurants. He was a billionaire.

ADRIENNE:
Have we started talking about the DST yet? Yeah, we’re talking about ants

ATTILIO:
and grasshoppers. And so I was gonna get Kyle is gonna give us wisdom to help us be more like the ants work and save for the future. Instead of the grasshopper.

ADRIENNE:
I want to Well, we had we had Haaheo on before the break before we brought Kyle on and I just want to give another shout out to the PSI Seminars. That is actually how we got connected with Kyle. We Kyle. Yes, it was through PSI.

ATTILIO:
Yeah. And Kyle so the shot. Yeah, go ahead.

KYLE:
Oh, no. See, that’s a great story of how you know I think Adrienne you learned about the DST was, yeah, it was it was

ATTILIO:
telling her to tell the story.

ADRIENNE:
So I was I was actually I was auditing the basic because once you take it the first time you can go back for free. Yep. So I was doing that in Pepper. ration for the women’s leadership. So I just felt like I needed to brush up. Yeah. And it was really nice because Kyle’s wife, Laurie was also auditing and she was my, you know, my partner for some of the exercises. And I was just sharing with her how stressed out I was about this your woes? Yeah, like this homesale. And I was gonna have to pay all these taxes. And she’s like, Oh, my husband can help you with that. And I was like, what? I don’t think anyone can help me with this. Like, I have to sell it. I don’t have great credit right now. There’s no way that I can do a 1031 exchange to take a hit. Yeah. So she’s like, No, my husband can help you. Let me just connect you with him. So I’ve remained open minded. And I had an awesome conversation with Kyle. And, you know, the timing couldn’t have been better, because I think only had like, you know, amount of time. Yeah. And Kyle, Kyle and his team went like, right into action, and boom, there I was into the DST.

ATTILIO:
So here’s the ABC and then Kyle’s gonna flesh out the details. The A is I had you had an investment property. The B is you did a 1031. And then the C was the DST

ADRIENNE:
the 1031. And the DST C, and then the DST and I still own that DST and it’s gone up. I think, Kyle, it started at like, it was like a 5% cap rate. Now we’re at like eight something. Yeah. And over 30 percent equity game. Yeah.

KYLE:
Yep. Yep. Yep. And just feel and that is also the that’s all the icing on the cake. And I mean, going back to where you were in terms of the other, you really had no options? No, you know, with the value that was nothing really you could buy for, for what you were going to net out of that sale. Yeah. And I don’t think you’ve could have qualified for another mortgage to replace the full value and attend to an exchange. And then your timeline was too short to find something. So yeah, you know, I look back at that was all of all of the clients abuse DSTs. With me our success stories that yours was, I mean, every every point we hit No, we’re able to do the taxes, get you the non recourse loan, get you better income, and that incomes increase, and so as the appreciation, so yeah,

ADRIENNE:
yeah. So it all started with an audit of the PSI seminar.

ATTILIO:
So you saving everybody that random chance of meeting Kyle’s wife by coming on the show and sharing the information right now. So if you own investment property here, in Hawaii, any Island or anywhere or anywhere, yeah, but if you own investment property here in the state of Hawaii. What So Kyle, what, what, why would someone want to get out of him of that investment property? And then And then what’s the 1031? What is that?

KYLE:
Okay, so let’s talk about why people buy real estate in the first place. For some of the things we just discussed, owning a real asset that appreciates over time. And that helps diversify the overall portfolio, right? You’ve got 401k bank accounts. And now real estate is an asset class that helps diversify and maybe even helps solidify, right? The type of growth potential, right, and then you’ve got income potential off of that you’ve got tax deduction, right? So people buy investment property for those reasons. Yet, with all the good there often comes, some not so good. Right? And we start with the terrible TVs, which in some cases are the tenants are fighting the tenants keeping the tenants happy? Yes. Right. And then you’ve got termites and potential taxes. And there’s all these trash, right? The point is, replacing toilet is all this things you have to do to maintain a physical property that you own and manage or you pay a property manager and that costs are eating into your profit margin. So those are some of the drawbacks. And then, you know, some people say, Well, what can I’m done managing property, I don’t want to deal with tenants and the upgrades and I’m just gonna sell it. Now. If you have some appreciation on that investment property, right, you bought it, you know, as you bought it for 60,000 back in 1950. And now it’s worth a million dollars. Today. That’s a ton of capital gains. And after you add a federal state, Medicare surtax and depreciation recapture, you might be paying over 30% on almost a million dollars of

ATTILIO:
gain. Right. So that’s like 300 grand boom to Uncle Sam.

KYLE:
Yeah, so then enter tax code 1031, which allows you to sell an investment property and replace it with Another investment property, as long as you’re going from investment to investment, and it doesn’t have to be selling a single family home and getting another single family home or selling a condo for another condo, you can sell any type of investment property, replace it with another type of investment property. So you could sell a single family home, get another townhome, or you could do water rights, land rights. You could do a commercial property, or you could do a DST or an upgrade. So those are the securitized

ATTILIO:
titles, they call that like kind and then they they went update the IRS code to for cultural awareness here in Hawaii. They also have a sub section in there for Hawaii, people doing it, like the kind like the time, like the time. So if you’re not sure if the other property is like the kind, just call Kyle. But keep going.

KYLE:
Yeah. And so under that ruling, it says that as long as you replace equal or greater value, then you can defer all of your capital gains tax. Yeah. So the other benefit of owning real estate in general, right, that has some appreciation, and let’s say you, you sell and replace and seller plays 1031 all the way until you pass away. And you leave that property to your children, grandchildren or any individual beneficiary. They get a step up in cost basis. Was that a sale? is on? Yeah, so. So as he bought it for 60,000? Yeah, it’s worth a million. She passes away, leave it to her children. Their basis steps from Auntie’s was 60,000. Right. So $940,000 again, now the beneficiaries, they get stepped up $2 million of basis, okay, zero gain for this folder right away. No capital gains tax.

ADRIENNE:
And you call that swap until you drop

ATTILIO:
swap until you drop?

KYLE:
or defer until you die. You

ATTILIO:
die. Yeah, see these rhyming things? This makes it easy for you guys to remember. And then those are good memory hooks. But

ADRIENNE:
there’s Kyle, you guys do some informational type seminars that are on Zoom, and then also in person? Yeah. What could our listeners expect? If they were to sign up? Or, you know, how would be the best way for them to get more information?

KYLE:
Yes, that’s a great way to get more information. Well, I know. Team Lally years ago, built a great website with a lot of information there is a really high level. I also want to note that when you look at a DST, specifically, if you’re going to do a DST through your 1031 exchange, you have to be an accredited investor. Yes. So an accredited investor is someone that makes $200,000 or more per year as individual, or $300,000, or more as a couple, or you have a million dollars of net worth. So he can have different levels of net worth and have zero income. That’s typically Oh, boy, we find most people are accredited just because they own investment property. Yes. And so the best way to learn more about that DST as a potential strategy for replacement property is yes, attend a zoom, or attend one of our luncheons, they’re all informational. And you know, we love working with Team Lally, because, you know, obviously Adrienne has done it before. We we help educate the entire team. And so of all the realtors that that I work with in Hawaii, Team Lally has some of the most educated realtors in the area of investment property.

ATTILIO:
Yeah, I’ve done it twice. done it twice. A two time offender. And I tell it’s huge for you people out there that have real estate. And when you pass on you want the kids beefing at your funeral. No, you don’t want the kids beefing at your funeral? Because I will tell you we see it on the side. Well, first of all, make sure you guys get a trust.

ADRIENNE:
Yes. We have an excellent attorney Amphay Yeah, he’s gonna be updating my we know Amphay through PSI. And to soccer to

ATTILIO:
Yeah, and he played on my soccer team and I played with gold legends, legends 45 and older and the 35 and older I founded who founded both those teams with me so soccer but anyway, so Amphay with Estate Planning Group will get the estate planning group and get the trust but for me, Kyle, my personal goal with my investment property is that when you when you die and you have real estate one first of all, it’s a very low probability that the kids have skill sets who manage it are that they want to or that or number two that they want to. And then the second one is that, you know, if you unless you give only child, you know, or maybe you have siblings and they eat a lot of meat and knit binge watch on Netflix and don’t exercise, maybe that will work out too. But at the end of the day, it’s very hard to have consensus with siblings on real estate and we get front row seats to this because yeah, we gotta referee we gotta go Switzerland that all the time. But tell them for inheritance or succession planning. What’s the benefit of a DST?

KYLE:
for the benefit of DST is because you own fractional ownership in a multi million dollar institutional commercial property. So let’s say of this $200 million DST portfolio, you own a .02%, with your $100,000 investment. So when you leave that when you pass away to your children, they get a step up and basis, you know, so no capital gains tax. And now each children will get a detail on how you link to them. Let’s say it’s evenly split, they get an even split of your fractional ownership. So each child can decide, okay, well, I liked the income. I liked that I own property that I don’t have to manage. So I might just keep my ownership take the income. Another time I say, You know what, I want that for a down payment, or I got some expenses, they can liquidate cash out. So the only the only child that make it bummed out is the one that was living at home watching Netflix and

ATTILIO:
well, you know, you don’t have to do an even split. You know what I call the kid and will never call you a mom and dad’s day you give them less? And then the good kid you give them the most and then middle rotten child, you give them a little bit let no I’m just kidding. But the bottom line is that it avoids a lot of the bickering and arguing and are we going to sell not sell because we had hard real estate, you got to have a consensus on what you’re going to do, because you can’t take a chainsaw and go start cutting it up into pieces with along with the income. But at the St. It’s much easier, much easier to separate the income stream and allow each individual child based on their goals and priorities to have have their own decision on what they want to do. So Exactly. Yeah. But and that’s a big motivator for me, because that’s how I want to my succession planning for my three kids and what I will how I want to pass on my real estate portfolio to them is that it’ll be in a DST

ADRIENNE:
so So Kyle, like what kind of projects or offerings are there currently? For the DSTs?

KYLE:
Yeah. Will they change from time to time as they fill up yet? The type of properties that go into these DST portfolios are student housing, nursing homes, grocery self storage, there could be warehouses, you know, like that would have been Amazon or Walmart, things like that. Yeah. So the different types of properties that go into these and it could be one property in one state, it could be multiple properties in multiple states, which adds to the diversification. Right, I have some clients that don’t want to have all their assets in Florida. Yes, because of the because of the potential natural disasters, however, sometimes those pay really good income, right. And also minimal investment into these beauties, usually around $100,000. So if you’ve worked to sell a, you know, a million dollar property in Hawaii, and you know, you’ve got a $300,000 to work with, you could go into three separate DSTs three different asset classes, right, you have a warehouse, they self-storage and a student housing. So you diversify by geographical, geographically diversified. And also asset class diversification.

ATTILIO:
Remember, you remember Harry Kojima, let’s go fishing. I don’t know if that might be before your time, but he had one show called Let’s go fishing. Yeah. And he would like get the fish and then they would you know, dress the fish, butcher the fish and then he would cook them right there and he will get the hot chili oil. Sure, right there on the beat. So you know, your real estate investment in property is like when fish. So some kids like Oh, I like so she needs to and so she made that part was like, Oh, I like them on the grill with the hot peanut oil then you do them that way for them. And then the other ones like Oh, I like on Pocky with Lemo and chili pepper water and then you do them that way for them. Instead of like, no only making the fish one way and And no matter how you like it or don’t like it, this is how I’m making the whole fish. So that was my Larry. Harry Kojima. Let’s Go Fishing analogy for DST.

ADRIENNE:
Yeah, yeah. So So Kyle, before we wrap things up, because a few minutes left, I want to I want you to explain to our listeners who, you know, may be doing a 1031 exchange and they have the leftovers where the boot How does like how is that beneficial? This DST strategy? Yeah.

KYLE:
Perfect. Yeah. So oftentimes, we find it let’s go back to auntie selling that million dollar property while she’s alive. Let’s see, she wants to downsize a little bit, right that? No, no single family homes are getting too much work. She wants to go into a nice new apartment or a condo in Kakaako. Right for $800,000. Do that $200,000 leftover. There’s not much you can buy in Hawaii for 200,000. And most people in the past would just pay the taxes on it right? That leftover we call boots. So now there’s a few we can put the boots into one or even two DSTs. Avoid the capital gains tax and make income off of that $200,000. And also diversify the portfolio. You’ve got those two assets going to the kids home or however you want to split it. Yeah. And so it’s a way to take care of that.

ATTILIO:
The leftovers you know you’d like to it’s like that family, they go family get togethers and then get leftovers. And then they brought zip law.

ADRIENNE:
And then one more thing we have that I want to touch on. That’s very important. Yeah. So we talked about never have a failed 1031 Exchange? How does the DST help? You know, bulletproof? 1031? Yes.

KYLE:
Oh, yeah. So going back to the 1031 you know, they have very strict timeline rules, right. So on the date you closed on your investment property, you have 45 days to identify the next property and 180 days total, close on it. So right now the markets very tight, like inventory is low. And there’s a lot of competition when people are looking for investment property. So it’s hard to find a good replacement in that timeframe. With a DST, we almost always have availability in at least a few different options. So I’ve gotten calls on the final hour. And then yeah, it’s, it’s better if we have more time to kind of look through maybe put some reservations on a DST that we like, yet. We can literally sign the paperwork, you know, open it up. And as quickly as soon as the as soon as that day comes within the week, we can fund into the DSTand avoid a failed 1031 Exchange.

ATTILIO:
Well, just like everything that’s awesome, and all must come to an end as at the end of our show.

ADRIENNE:
Thank you, Kyle. Thank you, Kyle. Excellent information as always, we’re gonna see you on that webinar. That’s right. All right.

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