How Do 1031 Exchanges Work with Julie Bratton

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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. Well buy it. I’m Adrienne and I’m Attilio. And if you have any questions, just give us a call at 7999596 or check us out online at Teamlally.com.

ATTILIO:
Our guest today graduated from San Diego State University with a degree in a Bachelor of Arts and Science in architecture slash interior design. She you know her house inside is really nice. She began her real estate career in 1994 selling properties, later coordinating transactions for top producers.

ADRIENNE:
After showcasing her expertise. She was recruited by Old Republic to start a statewide transaction. By May of 2001, she was leading the 1031 exchange department for the state of Hawaii for Old Republic. She’s risen to Vice President leaving a lasting impact on the real estate industry. Please welcome back. Today’s guest, Julie Bratton.

ATTILIO:
Hi, Julie. Hi, everybody. How are you? Great. You know, we known you so long I remember when Adrienne and I met you Elementary School Nanakuli.

ADRIENNE:
We have known a long, long time.

ATTILIO:
It seems like we met in elementary school at Nanakuli elementary but was probably what network was a networking event. We were drinking the old fashions with a big ice cube. Her name was inside the ice cube. No, that was one of her other events. That was an anniversary anniversary event. That was cool. Thank you. That was fun. Yeah. So Julie, you’re you remind me and I first thing I want to say is that there the reality of this name about this. This type of person I’m about to say is actually very positive because we met met an apprentice version of one. But you’re like the geisha of 1031 exchanges. And what I mean by that is a geisha is is considered a consummate performer, artists and artists and they do this for years, like mastery level mastery level. We got to meet an apprentice and she’d been doing it for six years. That’s our one thing. So how long have you been in the 10? 31 game, then you can totally use that you’re the geisha of 1031 exchanges because you’re one thing.

JULIE:
I have been an exchange I’ve been doing exchanges for 23 years. I started in my 2001 exchanges and before that, yeah by sold real estate.

ATTILIO:
Transaction coordinators. Cool and people thinking oh, wow, she must be old but I’ll tell you right now I don’t care how old she is. She looks great.

ADRIENNE:
Yes, she does. She doesn’t she doesn’t age. She looks the same as when I met her in 2000 2003. Whenever

ATTILIO:
we were running as you at Bon Jovi concert us I think he was wearing some leather pants. That’s a true fact. Jovi, Jon Bon Jovi, I’m 55. Jon Bon Jovi that was like, I was like, 15 years ago. But anyway, Julie likes to have fun, but she’s also a master of the 1031. And I will tell you, well, let’s just get our go to personnel.

ADRIENNE:
What is a 1031? We keep mentioning this number like what is that? Is that

ATTILIO:
is that’s a combination to your high school locker. What is that?

JULIE:
No, I 1031. Exchange is a way to defer paying capital gains tax. So as long as on the sale and the purchase of investment property. Yes. So the IRS has that’s their IRS code. It’s 1031. Exchange? Yes. So you have to as long as you follow the rules, you can have a tax deferred transaction and not have to pay.

ADRIENNE:
Well, let’s, let’s talk a little bit about these numbers. So let’s see somebody has a million dollar home, we were just talking about what the median sale price is in Hawaii, and they’re looking at facing some capital gains taxes is their investment property. Yeah, yep. And they need to sell it. So if they don’t do a 1031 exchange, what kind of taxes? Are they typically being hit with?

ATTILIO:
Depends on what they owe? No, that’s a great,

JULIE:
that’s a great question. Because this is probably the number one reason why people do an exchange is to defer pain, those capital gains tax and you have the federal that 15 or 20%, depending on your tax bracket. Yes, there’s the state tax that starts at seven and a quarter. There’s depreciation recapture that’s taxed at 25%. And then maybe the 3.8, affordable care tax, if that applies to this particular. So it can add up really quickly. Now

ATTILIO:
depreciation on 1031. But depreciation real quick 27.5? Is that what it is for residential?

JULIE:
Well, I’m not sure about that portion, but the deep create depreciation recapture that you would pay on the sale of an investment property if you do not do an exchange is taxed at 25%.

ATTILIO:
Yeah, so what that means folks is like, you’re, you’re getting a tax benefit of depreciation. So it’s, I think it’s your purchase price, divided by and don’t quote me on this, because we’re not CPAs. And we’ll just get that disclaimer out of the way, but I’m 99% Sure is 27.5. And so if if you if it’s not 27 and a half years later, that you’re selling that property, you’re gonna have recapture on that depreciation that you’ve been given. And whatever the tax

ADRIENNE:
rate, you’re gonna want their tax money back.

ATTILIO:
They’re like, we give you a depreciation. What are you selling now? Okay. And then we want to back 31 is the solution,

JULIE:
yes. And depreciate depreciation, taking depreciation, when you own investment property is a benefit. Great, but if you don’t, if if you do outright sale and do not do an exchange, you’ll have to bring that back to the table, and it’s taxed at 25%. So you still get the benefit. But you know, again, if you’ve owned a property, you know, just a year or so it’s probably not significant. But if you’ve owned it, 15, it could be. So it is something to think about, and let’s explain it to people. That is that is the main reason people do an exchange. And

ATTILIO:
let’s explain, like, let’s say your million dollar property, and I don’t know, it depends on what you owe on it, and this and that, but let’s just say that you’re going to owe 50 to 100. I’m just picking a number. Let’s call it $100,000. In taxes

ADRIENNE:
on it’s gonna be more than that. But a million.

ATTILIO:
Yeah, the question so whatever, it’s 200 it whatever that number is. Do you want to write that check to Uncle Sam federal taxes, Uncle chemo, Hawaii state taxes, or would you rather put that into the next property? That’s basically what you get to do it at 1031. And then soil real quick because a lot of even as agents will misquote it will say exempt versus deferred. explain to people what’s the difference why that’s you got to make sure you’re saying the right word exempt versus deferred

JULIE:
It’s a deferral of tax not to get away from paying tax forever. So you have to continue to exchange. So you can exchange exchange exchange until you pass away. And then your beneficiaries or your heirs will inherit your investment properties add a step up in basis, so they won’t inherit your capital gains burden, they’ll just get the properties. They’ll pay a state tax, but they won’t inherit your capital gain burden. Or you can exchange exchange exchange into maybe something you want to live in, and then eventually sell it. But when you eventually sell the asset, that’s when taxes are due. Yes. So it’s pretty much a deferral of tax unless you make it your forever home, and you pass away and your kids inherited at a step up and basis, or you just pass away and your kids end up, inheriting and how to step up and basis. So it’s a deferral of tax not to get away from paying tax forever.

ATTILIO:
To circumstances Yeah, and so that explanation and what what Julius Julius the expert on help you guys execute what we’re telling you is this, it’s a wealth building strategy. It’s nothing new or crazy. People have been doing this for many, many years, I You

ADRIENNE:
gotta follow the rules. And if you have a misstep, then that could be a very expensive misstep.

ATTILIO:
You know, a 1031 is like hiking up a mountain, you never been to, you need a guide.

JULIE:
It really is a wealth building tool, because you can take a not so great asset, or just a ho hum asset and sell it and get into better income producing property. I mean, you can really do this, um, I’ve had people sell commercial buildings, and buy single family homes and condos is their replacement property. So they use it as estate planning. And then I’ve had people just dabbling and selling investment properties for the first time and they end up moving up and buying multifamily and commercial buildings. So I mean, there’s just so many variations. So both building is, is very, it’s like the terminus scenario. It’s

ATTILIO:
like real life monopoly. You You go around and around, and then you got the you got the red house. And then you trade three red houses in for the green apartment. And then the hotel, and then the three green up green apartments into one hotel. Yeah, so just like Monopoly but real life.

ADRIENNE:
And like Monopoly, there’s rules. Yeah, like, what did these? Let’s,

JULIE:
let’s go over the rules real quick. Yeah, so when you sell the relinquished property, the investment property that you want to sell, let’s just say for a million, in your example, you need to buy a replacement property or a replacement or replacement properties, because you can buy more than one, or equal to or greater than a million to have 100%, deferral. And you have to do this within a specific period of time. So the day you close on that million dollar sale, the clock starts ticking, you have 45 days to identify in writing what you’re going to buy, and you have to close on those one, or all of those properties in 180 days. So the 45 days is included in the 180. You don’t get 45 And then one ad and there are no extensions. And this is really the black and white of exchanges. Yes, you know, there’s no extensions on these on these timeframes. So, you know, a little proper planning and a little, you know, crystal ball action or foresight is very helpful in an exchange, because you can start shopping for properties that you want to purchase in your exchange, you know, early on. So when you’re in your 45 days, you’re feeling comfortable about where you’re going to buy, or what area you’re going to buy or what project you’re going to buy into. So, you know, timing is everything on an exchange. So,

ATTILIO:
Julie, now,

ADRIENNE:
we mentioned the million dollar property, I think it’s safe to you also share if this property had a $500,000 mortgage, what must you do with the replacement properties with the

ATTILIO:
debt? Yeah.

JULIE:
Okay. So in an exchange, you do not get debt relief. So you have to replace that mortgage that you had on the relinquished property into the new property. But when I say replace, and everything you read online, and even as I said, it translates, and you are required to get another mortgage, and that is not true. You can replace that mortgage with cash if you want to. So what happens is you sell the relinquished property, escrow pays off everything. And then the net proceeds come to me. And the net proceeds that I’m holding is the down payment. And you either have to come up with cash to replace that mortgage or get another mortgage to replace that mortgage in order to be able to buy something equal to or greater than a million.

ADRIENNE:
That’s great news. I love that So you’re not forced,

JULIE:
I really want to, I really want to emphasize that because it really, people really translate this. And I don’t blame them, as you must get another mortgage, just have to replace it and replace it with cash if you want. Another one more term that I want to bring up that is very misunderstood is like kind, like kind translates as if it must be condo for condo, single family for single family, they get land or vacant land. And although all of those examples are just fine, it’s really any combination of real property. You can sell a condo and buy a single family home, you can sell a commercial building and buy condos if you want. As long as it’s real property and you’re using it for investment. You can do an exchange with it. You

ATTILIO:
can also get a DST. Yeah, that’s a whole nother that’s another whole show. But the easy thing for listeners to to get the solution to everything. You’re like, oh, no, this is like Karen call Julie.

ADRIENNE:
And that’s what we do. We have our clients like we kind of give them a mailer light about the 1031 exchange. And then we always advise them that the next step is I need to get on a call and talk to Julie and talk about their particular situation, because she’s the expert, and she’ll be able to really advise them. Oh, the

ATTILIO:
other term. And you tell me, I mean, we know about it, because we’re in the industry. But do people know you as an intermediary?

JULIE:
Yes. So the IRS says you have to use a Qualified Intermediary to do an exchange. So people have there’s variations of how people relate to that. So thanks for bringing that up. Qualified Intermediary QI, which is short for Qualified Intermediary, a commentator facilitator, 1031. Girl, that’s all the same thing. You need to use a Qualified Intermediary to do an exchange. Yeah. And and

ATTILIO:
the, we just want to get those because this is all like, I call it like lingo. And if everybody’s talking Mandarin, and you don’t know what the heck it is, they can talk all day long. And you’re like, these are all buzzwords. Like she’s saying

ADRIENNE:
Qualified Intermediary. Julie, what does it take to become a Qualified Intermediary? Yeah.

JULIE:
Well, that’s really a great question. Did you know that this field is an unregulated field, and anybody can have a business card and say, just

ADRIENNE:
print the business card, which is pretty scary. That’s very scary,

JULIE:
licensed and bonded. A

ATTILIO:
lot of people wake up the next morning, you’re a Qualified Intermediary. There’s

JULIE:
a you know a lot of imposters out there a lot of people that say they’re Qualified Intermediary, but they don’t have to have and there’s no regulation where they put your money. So it’s really important when you shit when you hire a Qualified Intermediary, that they have all of those things in place.

ATTILIO:
Super easy for everybody. All you do listen to the show, and we’re telling them call Julie.

JULIE:
She’s, well, yeah, that’s true. But yeah, be mindful of that. Be mindful of that, like so like, for just an example, our fee starts at $950 When you sell the relinquished property, and it’s 575 when you buy the replacement property. So somebody will call me and say, Well, I found someone to do it for $400, cheaper or $300. Like, I don’t understand how people can do the business for that. I mean, there’s so much that goes in, that is involved in an exchange. There’s so much orchestration, I have me, I have my staff, we have banking departments, we have attorneys, I mean, there’s a lot that goes on. So when I hear people say, Oh, I’ll do it for $400 I like I don’t know what to say to that.

ATTILIO:
Here’s what we tell people like, you

JULIE:
have to, I mean, you’re saving hundreds of 1000s of millions of dollars in taxes. And, and that’s important to you I sometimes I don’t understand and

ADRIENNE:
those those and those fees are write off. You can write those off your taxes. Yeah, they’re doing exactly and you are a proven a proven professional, not just some random person who printed out a business card and who knows what they’re gonna do with that money.

ATTILIO:
I just want to say one word, toilet paper, you know, you go to Walmart for toilet paper, but you’re gonna go to a law firm for expert legal advice. You’re not going to find your attorney at Lamar at a at a help desk at Walmart. And so you gotta be you know, change your Walmart mindset to the appropriate things. Toilet paper. Yeah, doing a complex thing called a 1031 where you got to, you know, anything could trigger an IRS rule and boom, you have capital gains. Come on, folks. Just I would default to looking for expertise than being so price conscious regarding something like that. But it’s just me.

ADRIENNE:
And these capital gains like I know Though like firsthand, we had a client that did speak with you, Julie. And they, they were like, you know, 1314 and they’re looking upwards of a quarter of a million dollars in taxes that they’re gonna have to pay unless they do this 1031 exchange. So, I mean, it’s not chump change that we’re talking about here is big money. A lot of money.

ATTILIO:
Yeah, it’s important. Julie’s all in man.

JULIE:
If I give my give my, my club, my my club, my company, a little plug here is we we just had our 30 year anniversary, what you were talking about last year, and we we have never had an exchange fail on an audit for something that we have done. And we’re really proud of that.

ATTILIO:
Nice. You know, Julie’s all in she showed us her 1031 tattoos right on her shoulder with a fitness right in the middle of a big heart wings and everything. So it

JULIE:
was my husband won’t let me get out there. But okay, I’ll get I’ll get a what do you call it stick

ATTILIO:
on? Temporary make one temporary one.

ADRIENNE:
So Julie has, have there been any recent tax updates or changes that investors need to be aware of? Yeah, with the 1031?

JULIE:
I’m not really but as soon as there, we’re probably going to start hearing a couple of things there’s Congress is always, always targeting it right version of 1031 exchange on the block. I can’t see them ever getting rid of it. Not saying that they wouldn’t. But if they were going to change a variation of it. I mean, they might, you know, limit how much you can different a year? I don’t know, but it’s not going to go away. And we do not put out information about what if, unless we really have something to look at, and it’s concrete. So sometimes, you know, you’ll see other QI or Qualified Intermediary, send stuff out, you know, and I feel like it creates mass hysteria for no real reason. Yeah. Unless we have something to really look at and, and contemplate, then we’re not going to put anything out on it.

ATTILIO:
Yeah, cuz I don’t doubt that probably the first year after they put it into law. People were trying to shoot it down. And they have been and we’ve always heard, I mean, that years, do you think it would be
a source of income? It would be an amazing source of income, but it would be devastating for so many industries and the economy, I feel. Yeah, I just don’t see it happening. Yeah.

ADRIENNE:
And then Julie, you can share a success story that you’ve recently been a part of, or 1031 exchange and or a curious,

ATTILIO:
curious story.

JULIE:
Oh, wow. And a success story. Funny, okay. I had a lady during, I guess, COVID, who has a six that I have to Yeah, one success story she was during COVID. She was telling her relinquished property, she will she sold it, I was holding her money. And she was all set to buy her replacement property. It was closing in two weeks, she was a dental assistant, and she lost her job. Oh, now the lenders not going to give her the loan. Oh, and she’s freaking out. She’s in the middle of this exchange. It’s after her 45 days. He’s gonna pay taxes on it anyway, what do you do? So you know, I’m, of course, I feel bad for an urge single lady, she’s gonna have $200,000 to pay. So I said to her, Well, why don’t you ask the seller of your replacement property, we don’t know what their goals are, what they’re gonna do with the money, but see if they will give you a purchase money mortgage, or, you know, that solid type of seller financing. And if they will do that, then you can complete your exchange. I mean, if they had to do an exchange, it probably wouldn’t work for them or if they had that money earmarked for something that probably wouldn’t work for him but you know what it works for them purchase money mortgage and she was able to put a deal together and and for all her taxes then about three months later, it was so cute. She called me back I was like, I got my job back. And I’m applying for my loan and I’m getting it all squared up and I’ll we’re up with these the sellers but that was really kind of a sweet story.

ADRIENNE:
Oh, she was she was really lucky to have to have you involved and have that outside of the box. Kind of advice. Yeah.

ATTILIO:
Cuz at 1031 lady down at the desk at the desk at Walmart was not going to come up with this.

JULIE:
Yeah, she’s an order taker.

ATTILIO:
Yeah. Well, you had yet another one. You were saying something.

JULIE:
I am one other story. Uh, well, it’s also perspective for you. I think the most stressful part of an exchange for people is the 45 days finding a replacement property and especially in this environment. You know, the market is swift. There’s not as much inventory but I think one of the reasons is is people are looking for perfect. Yeah. And remember, you’re buying an investment property, you’re not gonna learn to live in it not gonna marry it, you’re not going to be stuck with it. Of course, don’t buy a piece of junk disclaimer, if you had to make a lateral move. Just to defer paying the capital gains tax, do it. Hold on to it for a year or so. And if and as soon as things calm down, you could always sell it again and do an exchange into something you really want. Yeah. And I feel like that is an important conversation to have to investors, because they don’t realize that sometimes they’re in their own way. I say that in the most loving way. Yeah, but they’re not thinking about oh, yes, this is an investment property. Yeah.

ATTILIO:
I’m gonna get all the ducks. So

JULIE:
picky? Yeah. Yeah. So I feel like I have that conversation with a lot of people. And it really helps them move forward. I mean, sometimes it doesn’t, they’re just going to be picky. But I feel like a lot of people have like, oh, yeah, you’re right. I’m not gonna marry this property. I’m not stuck with it. I can sell it eventually. And again, don’t buy a piece of junk. If you had to make a lateral move, just to get out of this. You know, on your 44th day, it’s

ADRIENNE:
temporary. It’s a temporary situation that can be exchanged louder than the future. Yep. So. Okay. Yeah.

JULIE:
So I think that conversation needs to be had with, you know, some, some sellers who are on the fence. Sometimes I think they’re on the fence because of the 45 day. Well,

ATTILIO:
you just had it with all the sellers listening right now. All these investor owners listening right now. They just they’re like, Oh, wow. All right. Well, that was helpful. Thank you, Julie. All right. So we’re coming to the end. Yeah, coming to the end of the show. Thank you so much. You’re like Michael Baldwin on SNL, you will repeat guests. And we’ll have you again. Again, later on another one trying to get you up to 10 shows and a punch card and then we buy you ice cream.

JULIE:
Okay, sounds good. I gotta have toppings. Okay. All right. Thank you for having me.

ADRIENNE:
Thank you, Julie. Thank you. Thank you.

ATTILIO:
Bye, guys. All right. So that speaker in that topic was a prime example of how we are consultants, not realtors. And we take a look at the big picture everything we go 30,000 Down to 10 down to five down to ground level. We’re not going to go straight to ground level slap a sign up front.

ADRIENNE:
I mean, we get we bring in experts Yeah, to advise if that’s not our expertise. So we always bring Julian when there is an opportunity to educate maybe a new investor or even a seasoned investor about this 1031

ATTILIO:
So if you want a sales pitch, visit the competition if you want a consultation 79995967999596 Or Google team a lally.com. That’s L A LL. Y.

ADRIENNE:
And if you want to get a hold of Julie, you can always reach out to us we’ll put you in contact with Yeah, you

ATTILIO:
know what Julie’s number is? 7999596 That’s right. All right

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