How to Use a 1031 Exchange to Buy Your Dream Home Tax Free (Revenue Procedure 2008-16 Explained)

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Show Summary

In this episode of the Investor Fuel podcast, Olivia interviews Russell Marsan, a leading expert on 1031 exchanges. Russell explains the intricacies of 1031 exchanges, emphasizing their role as a powerful wealth-building tool for real estate investors. He clarifies the concept of ‘like-kind’ properties, discusses how 1031 exchanges can be utilized for purchasing primary residences, and highlights the benefits of transitioning from rental properties to more passive income streams. The conversation also covers the federal nature of 1031 exchanges, the implications for flipping properties, and the importance of choosing reputable professionals in the industry.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • IPX1031’s Website
    • Russell Marsan on Facebook
    • Russell Marsan on LinkedIn
    • Russell Marsan on Instagram
    • Russell Marsan’s Email Address: [email protected]
    • Russell Marsan’s Phone Number: (530) 755-8355

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Russell Marsan (00:00)
  sell your rental properties, do a 1031 exchange, buy your dream home as a replacement property. For the first two years, limit your personal use in the property to two weeks a year or less.

  or 10 % of the annual rental history, whichever is a bigger number. And the second thing they have to do is they have to show at least two weeks per year of income from the property, So that means

  You can sell investment properties. You don’t have to pay any taxes. You can take all of those proceeds, buy your very expensive dream home, all cash.

  Olivia Gastineau (02:06)
  everyone and welcome to the Investor Fuel podcast. My name is Olivia and I’m joined here by my guest Russell Marsan. We’re happy to have you here Russell. Thank you for joining us.

  Russell Marsan (02:18)
  My pleasure, Liv, it’s great to be here.

  Olivia Gastineau (02:20)
  Yeah, we’re happy to have you here and I think our listeners are going to take something away that you’ve been approaching. So let’s just dive right in.

  Russell Marsan (02:29)
  Sounds good.

  Olivia Gastineau (02:30)
  So first off, for people who may not be familiar with your world, give us a short version. What is the main focus that you’re working on these days?

  Russell Marsan (02:42)
  Yeah, short version. So yeah, we’re the largest facilitator of 1031 exchanges in the nation, right? That’s all we do is 1031s. A 1031 exchange is actually the greatest wealth building tool in the entire Internal Revenue Code, right? Because it allows your real estate investors to reposition their real estate assets throughout the course of their entire life without having to pay any tax.

  Right? Because as somebody grows in life, it’s guaranteed that their financial objectives are going to change. And as they change, the 1031 allows you to pivot, right? To that type of property that better suits your current financial objectives. Because taxes can be pretty punitive. I mean, some states, yeah, maybe you’re going to pay 20, 25%. But other states like California, you could pay an upwards of 40 % in taxes.

  Olivia Gastineau (03:31)
  It sounds almost too good to be true.

  Russell Marsan (03:35)
  Yes.

  Olivia Gastineau (03:36)
  I think if you can explain a little more about the 1031, I think our listeners would really appreciate it. Like a like kind? What is a like kind in regards to 1031?

  Russell Marsan (03:45)
  Hmm. Yeah.

  Yeah, that’s a great question, Olivia. ⁓ There’s this terminology in 1031, right? It has to be the property you’re selling and the property you’re buying.

  involved in the exchange. They have to be like kind with one another, right? So there’s this misconception that, you know, as a visual person, you might think, well, that means if I’m selling the land, I have to buy land. Or if I’m selling single family rental, I got to buy single family rental for commercial for commercial. It’s not the case. It’s very misleading. ⁓ Like kind does not mean what a property looks like. It means how it’s treated for tax purposes. Any business or investment property is like kind.

  So that means somebody that Olivia, if you own five acres of land, there’s nothing on it, right? You own it free and clear, you have no mortgage on it. You’ve had it forever. It’s providing with zero cashflow and it’s providing you with zero depreciation tax benefits to help negate any cashflow if there were any. So it’s what we call in the financial analysis world, stagnant equity. Your land is worth, I don’t know, $300,000. That’s $300,000 providing with zero cashflow and zero depreciation.

  You can do a 1031, you can exchange out of the raw land, sell it to whoever wants to buy it, and then go out and buy a rental property if you want, or any kind of commercial, industrial, mini storage, right? Now I own cashflow property, right? have an investment property that’s providing cashflow off of my $300,000 of equity. Now I have improvements on the property so I can take depreciation.

  which lowers or helps mitigate the tax due from the income on that asset. And in a lot of cases, I may have a better appreciating asset because maybe the land’s gonna do better long-term than that. I’m sorry, the house will do better long-term than the land would have. I can do the entire transaction free, right? Using the 1031 exchange and the sale proceeds. People will be willing to do it if they simply knew the option exists. I can’t count the number of times. I’ve had tax advisors.

  Right? Tell my clients, you can’t 1031 exchange out of raw land to improve property. It’s not like kind. That’s 100 % false. It has never been true. But yes, but yet that’s out there. And this whole like kind definition is really the reason why 1031 is such a powerful wealth building tool. Right? If you look at all of the different asset classes in real estate, like you have raw land, single family, multifamily, commercial, industrial, et cetera, right? They all have different financial objectives.

  So as somebody’s financial objectives change in their life, right, they go from appreciation to cashflow to passive, et cetera. It allows you to pivot, right, to that type of real estate. The better suits your current financial objectives without having to pay the tax. Yeah, so it’s really important to know how broad that definition of like kind is.

  Olivia Gastineau (07:14)
  You seem like an expert in this field. How long have you been teaching others what 1031 is?

  Russell Marsan (07:20)
  over 30 years now, a long time. I actually have the designation as a certified exchange specialist, which there’s less than 200 of us in the United States that currently carry that. I also teach accredited courses for attorneys and CPAs. I’m a free resource to all of my clients, legal and tax advisors as well.

  Olivia Gastineau (07:35)
  Wow, that’s great. All right, I have some more specific questions for you here in regards to 1031. And I’m sure our listeners would love to learn from an expert such as yourself. Are you allowed to purchase any primary property with a 1031?

  Russell Marsan (07:37)
  Yeah.

  Okay, fire away.

  So we can say that a personal use property, I it’s considered where you live as being a personal use property. To qualify for 1031 deferral, the intent must be to hold for business or investment purposes, not personal use. So really, you’re not supposed to buy a primary residence directly with a 1031. Now that being said, the IRS created my absolute favorite revenue procedure back in 2008.

  It’s Revenue Procedure 2008-16 and it’s an actual recipe. It’s the IRS telling us, here’s exactly how you can use a 1031 exchange to buy your dream home. And if you follow this simple little recipe, the IRS can’t overturn or challenge your exchange. It’s a safe harbor. That’s why it’s my favorite revenue procedure. I read this thing like every night before I go to bed, gives me very happy dreams. So here’s the revenue procedure.

  sell your rental properties, do a 1031 exchange, buy your dream home as a replacement property. For the first two years, and this is the revenue procedure, you first have to satisfy a held for business intent. So for the first two years after the exchange, you have to treat that dream home two ways. One is you have to limit your personal use in the property to two weeks a year or less.

  or 10 % of the annual rental history, whichever is a bigger number. And by the way, if somebody’s going there to like work on the property or maintain it, that’s not a personal use visit. That’s a maintenance visit, right? So there’s ways to use it for more than two weeks a year. But anyway, it has to be limited for the first two years. And the second thing they have to do is they have to show at least two weeks per year of income from the property, which is a crazy low standard. So that means

  You can sell investment properties. You would have been killed in taxes because you’ve owed them forever. You don’t have to pay any taxes. You can take all of those proceeds, buy your very expensive dream home, all cash.

  And all you have to do for the first two years is limit your personal use and find your best friend, Olivia, to run it to for two weeks a year. That’s all you have to do. And then after two years, you can do whatever you want. Right. You can move into it.

  as a primary, you can treat it as a pure second home or vacation. You never have to rent again ever. And your exchange 100 % safe harbor can’t be challenged or returned. So it’s pretty cool. So if somebody is thinking about, hey, I’m to be moving to another primary residence in a couple years, we’re going to retire somewhere else, Or they’re thinking about buying a second home or vacation home anywhere in the United States, right? They can accomplish that with a 1031 right now. Pretty cool.

  Olivia Gastineau (10:57)
  Yeah, that’s awesome. That kind of brings me to what our next question for you is, you know, you’ve had a rental for a long time and you’re getting tired of dealing with tenants. Is that something the 1031 can be useful for?

  Russell Marsan (11:11)
  I’m super glad you brought this up because this is a need that’s out there and good today. People, you get to be retirement age and you’ve owned single family your whole life, you’re tired. Especially in states like California, we’re not in the Lord friendly states. You’re dealing with tenants, toilets and trash. And now you wanna just cash out and just.

  retire and not have to deal with those headaches. So what a lot of people have done in the past is they would just cash out of their real estate and pay their tax. And then they would take the after-tax dollars, right? So they give up 35%. So reinvesting 65 % was left over into something like a money market fund, right? And they’re gonna earn 2.5 % passive cashflow and never have to deal with a hot water heater or a tenant again. You just gave up 35 % of the income for the rest of your life.

  You can accomplish those exact same goals with a 1031 exchange and not have to give up 35 % and earn more than 2.5 % passive. ⁓ There is what’s called a DST or Delaware Statutory Trust. A Delaware Statutory Trust is a form of replacement property in our world. ⁓ Basically what it is, it’s the most passive form of real estate ownership.

  When I buy into a Delaware Statutory Trust with a 1031 exchange, I am a small owner, I’m a fractional owner in an institutional sized asset. It’s a hundred, $150 million class A asset like an Amazon distribution center, a senior care facility, something like that. I have zero.

  duties or responsibilities. I’ll never get a phone call from tenants. I never have to make any decisions. I’ll never be asked to pay for a hot water heater or a roof again. No outflow, only income. This shows up magically in my bank account once a month. ⁓ These types of properties, this DST, Delaware Statutory Trust, was approved by the IRS as like kind replacement properties 22 years ago in 2004. So they’ve been around a long time. but it’s just…

  What I see is people that have retirement age, they’ve owned single family rental properties their whole life. They built great wealth. They invested in the right kind of assets, single family rental properties, and they built phenomenal wealth and equity over decades. Now they’re retired. Now they’ve built wealth. They’re in the wrong asset class. If somebody’s retired at retirement age, 60s or above, they shouldn’t own single family rental property.

  They shouldn’t because primarily those assets are designated for appreciation not cash flow They need to be in a cash flow type asset and that’s commercial triple net lease You can buy your own commercial triple net lease nothing wrong with that. It just a lot of investors are not familiar with that So that’s where a DST is kind of like a safety net where somebody that doesn’t want to buy their own triple net lease can just kind of hitch their wagon to you know, Some multi-billion dollar corporation that does this all the time, but they’re pretty cool

  Olivia Gastineau (14:07)
  Lots of information. Thank you. How about crossing state lines? Is that allowed?

  Russell Marsan (14:13)
  Hmm.

  Great question. Yes. 1031 is federal. And so a lot of states, people move states. I mean, obviously everybody in the United States knows there’s an exodus going on in California and has been for a long time, but it’s common in every state that people leave states for various reasons, right?

  you’re chasing the grandkids because your adult children move to another state or you want to retire, you live in a cold climate, you want to retire in a warm climate. There’s just all kinds of reasons. Well, 1031 is federal, right? So if you’re moving to another state, 1031 allows you to cross lines. All states, every single state recognizes the 1031 exchange. So no matter what state you’re selling in,

  You can sell in that state and exchange into any other state with those proceeds. You will defer federal and state tax when you do so. So yeah, if anybody out there is thinking of moving to another state, relocating or just buying a second home or vacation home in another state, the 1031 is a great tool to get that done.

  Olivia Gastineau (15:51)
  And can you do an exchange with flipped properties?

  Russell Marsan (15:57)
  Oh, good question. That’s Olivia, you’ve done research here. So yeah, there’s actually two types of properties you can’t 1031, right? One is personal use properties. We talked about that already, but you can go through that conversion process we talked about. The other type of property you can’t 1031 is what the IRS considers inventory property. Inventory property means the entire time an investor owns that property,

  they’re thinking of reselling it, right? So a builder, they buy land, they subdivide it, they build spec homes, they sell them. That’s inventory property. Flipper, they buy, fix up and sell. Inventory property doesn’t qualify 1031. Now, I do get asked this question by clients.

  They’ll call me and say, hey, my realtor said to give you a call. ⁓ I do flip properties. I’m thinking of doing an exchange on my next flip. What can you tell me? ⁓ If somebody wants to use a 1031 exchange and it’s a flip property, there’s only one question I have to ask them in return. And that’s this. Mr. and Mrs. Flipper, do you need the money from your flips to live on? That’s the only question I have to ask. Because if they say, well, yeah, that’s how we pay our bills. Say, great. Don’t even think about a 1031.

  You’re going to pay ordinary income tax on your flips, just like the rest of us do on our income, and exchange is not a possibility for you. But some flippers say, no, right? I don’t need the money to live on. It’s a side hustle. They’re a teacher, they’re a policeman, right? They do something else for living. What they want to do is roll 100 % of the equity from the flip into the next flip. Ah, well, that person needs to start thinking 1031. But that means they need to alter their strategy. So instead of buying

  fixing up and selling, they need to establish a held for intent. So they need to buy it, fix it up, get some rental history in there, and then sell the property. When you go from…

  renting from, you being, basically cross the line from being a dealer to an investor when you rent the property, right? Dealers don’t get 1031 treatment, investors do, because you’re establishing a held for intent, because a builder’s not going to rent out a spec home. A flipper’s not going to rent out a flip. So when you cross that line and actually rent the property out, then you’ve crossed that line and now you’re looking at being 1031 eligible. There’s no stated time period, right? Because that’s the big question.

  viewers

  watching this are like, long do I have to rent it? There’s no stated time period. The IRS has never created a revenue procedure that says this is how long you have to rent it out before you can sell it. So talk to your tax advisor. Most tax advisors that I talk with seem to think one year seems to be safe. you know, buy it, fix it up, rent it out, own it in total for at least a year or so with some rental history, and then sell it and engage in a 1031, right? I mean, if a flipper engages in that strategy,

  they’ll do less flips, because most flippers don’t want hold the property for a year. Yeah, they’ll do less flips, but they will amass a lot more wealth, because they’re not giving up 30 to 40 % in income tax every time they’re selling the property. And there’s no right or wrong, right? Makes sense. I mean, if you’re just going to flip and live off that, great. But it’s just about knowing options, right? If somebody doesn’t need the money to flip on, then it’s just good to know your options.

  Olivia Gastineau (19:03)
  Yeah, definitely. And I know that a lot of people listening are either earlier in their journey or looking to level up. And I think that they would really benefit from hearing this from you. Which part of the country are you in, Russell?

  Russell Marsan (19:19)
  I live in Northern

  California, but I all over the United States. We’re the largest Indian nation by far, but roughly 60 % of the exchanges done nationwide are done by us. And like I said, I’ve been doing it for 30 years. So I have clients everywhere in the United States.

  Olivia Gastineau (19:35)
  Amazing. And before we wrap things up, is there anything else that maybe I didn’t ask you that you’d like to touch on about the 1031?

  Russell Marsan (19:46)
  I guess one little thing, maybe it’s a little known fact, but our industry, unfortunately, is unregulated by the federal government. So do we do? There’s no federal regulations, so no bonding insurance requirements, things like that, so no safeguarding the funds. So, you know, people just have to be careful.

  who they deal with out there in our industry. Just so your listeners know, like I said, we’re the largest in the nation. Our parent company is Fidelity National Financial. So we’re part of a Fortune 300 company. We have the highest level of safety and security and transparency in the entire industry. So we are the safest that’s out there as well. And your listeners out there, they can reach out to me anytime. They can email me, they can call me. I’m always available.

  Olivia Gastineau (20:31)
  Yeah, how can our listeners reach out to you? What’s the best way to get in contact with you?

  Russell Marsan (20:37)
  Well, I know it’s dangerous, but I’m gonna give out my cell phone number. So, cell phone number is 530-755-8355. Email address, simple, my first and last name, russell.marsan, M-A-R-S-A-N, at IPX1031.com.

  Olivia Gastineau (20:55)
  Okay, can you repeat your telephone number one more time? Because it cut out for the second.

  Russell Marsan (20:59)
  Absolutely.

  Sure. 530-755-8355. If somebody calls me at like eight o’clock on a Friday night, they don’t have to apologize. I’m a tax nerd. I’m a geek. I don’t have a life. So you’ll be giving me a life by simply calling me and asking me tax questions.

  Olivia Gastineau (21:14)
  Amazing. Look at that everyone. We have his number. I think that’s as good as it’s going to get. What service? He’s ready to help you.

  Russell Marsan (21:23)
  Yeah.

  Olivia Gastineau (21:26)
  Alright, so perfect and I really appreciate your time and sharing all of this expertise, your perspectives and we really need more people in this space who are doing something like this. I don’t think it’s really known and thanks again for being here and for those of you tuning in, if you’ve gotten any value from this, make sure you’ve subscribed. We’ve got more conversations coming with

  just like Russell, who are building their businesses out there. And we’ll see you on the next episode. Thank you, Russell. ⁓

  Russell Marsan (22:04)
  Thank you very much, Olivia. It pleasure.