Maximize Profit with 1031 Exchange: When to Use It and How | Aristotle Kumpis

Aristotle Kumpis (00:00)
you know, what it comes down to with 1031 exchange is it comes down to someone who’s owned a property for quite a while, you know, more than a few years, maybe five years, 10 years, 20 years, 30 years. And it could be any property that’s being used for investment or business purposes. So it could be a condominium that you rent out. It could be a townhome. It could be a commercial multifamily property. But if you’ve owned it for a long time,

there’s a lot of factors that play in why you would want to consider a 1031 exchange. One of them is the main thing is to defer capital gains. All So when you go to sell that property, if you’ve owned it for a very long time, chances are you have a really big gain on that property. And if you sell that and just cash out, so to speak, then you’re going to have a pretty large capital gains tax to pay. Just to give you an idea, the average capital gains tax is anywhere from

25 % to 35 % depending on what state you live in.

So basically defer taxes, people don’t wanna pay any more than they have to.

Dylan Silver (02:30)
Hey folks, welcome back to the show. Today’s guest, Aristotle Kumpis works with real estate investors on 1031 exchanges and has helped hundreds of clients defer taxes and reinvest into new deals. He also invests himself focusing on several markets, including Alabama and Tennessee, while living in California. His approach is centered around helping investors move capital efficiently and make smart decisions when buying and selling. Aristotle, thanks for joining us today.

Aristotle Kumpis (02:55)
Hey Dylan, thanks for having me on today. It’s great to be on.

Dylan Silver (02:58)
Now, when we talk about 1031 exchanges, a lot of people are familiar with this process and they’ve heard of it, but when does it make the most sense to do a 1031 exchange and when might someone not want to do a 1031 exchange?

Aristotle Kumpis (03:13)
Yeah, great question. really, you know, what it comes down to with 1031 exchange is it comes down to someone who’s owned a property for quite a while, you know, more than a few years, maybe five years, 10 years, 20 years, 30 years. And it could be any property that’s being used for investment or business purposes. So it could be a condominium that you rent out. It could be a townhome. It could be a commercial multifamily property. But if you’ve owned it for a long time,

there’s a lot of factors that play in why you would want to consider a 1031 exchange. One of them is the main thing is to defer capital gains. All So when you go to sell that property, if you’ve owned it for a very long time, chances are you have a really big gain on that property. And if you sell that and just cash out, so to speak, then you’re going to have a pretty large capital gains tax to pay. Just to give you an idea, the average capital gains tax is anywhere from

25 % to 35 % depending on what state you live in. New York, California, for example, are gonna have high state taxes. So that’s gonna factor into a higher tax bracket. And it’s a lot of money. So if you have $100,000 gain, for example, you can be paying 25, $35,000 minimum just on that. So basically defer taxes, people don’t wanna pay any more than they have to. Another reason is deferred maintenance.

This is a reason why I’m…

probably going to be selling one of my properties here. Well, it is why I’m going to be selling one of my properties and doing an exchange soon this year. And that is deferred maintenance. So let’s say you’ve got a roof or items, HVAC, all these things that are just wearing down and you have to spend 30, 40,000, 50,000 or more, 100,000 on redoing the house. You just don’t want to deal with it anymore. Maybe you want to sell that property, get into something newer, brand new construction or something that has already been renovated.

That way, can save you all the aches and pains of having to prepare all that stuff. And then another reason would be for depreciation. If you are an investor, probably know what depreciation means. On an investment property, you’re able to depreciate the asset, the property, for a certain number of years. And once that runs out, you’re no longer able to take that depreciation. So a lot of investors will 1031 exchange for that reason as

Dylan Silver (05:26)
Now, for folks who maybe haven’t done a 1031 exchange before, I’m imagining that it is super, super helpful to have someone like yourself in their corner and intermediary to help them through the process. Because if they’re going to their agent or even their lender, they might not be knowledgeable step by step on what that looks like.

Aristotle Kumpis (06:33)
That’s correct. So when you do a 1031 exchange, you have to use a qualified intermediary or an accommodator. It’s another word that we use in the industry. So we are a third party company and we make sure that you’re following all following all the guidelines that the IRS requires you to adhere to when you’re doing the exchange. We also hold your proceeds from the sale of your property while you’re identifying and purchasing your new replacement property. So it’s important that you work with a qualified intermediary on that aspect.

Dylan Silver (07:01)
I didn’t even know that. I feel like that’s one of these things that gets sometimes missed when you’re listening to this and hearing about people doing 1031 exchanges. Now, as someone who has grown a business in this space, do most people, once they’ve done a 1031 exchange, go back to the same 1031 intermediary? Or is there a specific advantage of using one intermediary versus another?

Aristotle Kumpis (07:23)
That’s a great question. would say the majority of people who do exchanges, let’s say, if I had to guess, I think the average investor might do two to three exchanges in their lifetime, right? Either on the same property or on other properties of my own. They could even do more exchanges, but two to three, let’s just say. And they’re generally gonna work with the same person over and over again because this is a relationship business, just like a lender or a title company or an escrow company title.

real estate agent, you’re usually going to gravitate towards someone that you’ve worked with before. If you’ve had a great experience, there are people out there that unfortunately have bad experiences with people and they want to go somewhere else. It also comes down to ⁓ expertise and knowledge. Someone who seems to know more about what the client’s goal and what they want to achieve is usually going to gel better with that client and that investor. That gives another reason why people might gravitate towards.

one QI or a combinator versus another one.

Dylan Silver (08:20)
Now I’m hoping I’m asking this next question in a way that is sensible. If someone is considering several different exits, like cash out refinance, a 1031 exchange, taking out a HELOC, or they may just say, hey, I’m not going to touch the original property or my homestead or what have you. I’m going to pool money together from investors or find some other source of funds. When does 1031 make more sense than say cash out refinance?

Aristotle Kumpis (08:49)
Yeah, so that is a good question. So one of the things I love to do, I love to educate people on how this works. the first thing I do, you were to call me and say, hey, I’m thinking about doing a 1031 exchange, the first thing I’m going to do is I’m going to sit down on the phone with you or in person. I’m here in Southern California if you live out here. But I’m going to go over your property that you’re selling. I want to know everything about it. When did you buy it? How long has it been in remittance for? What did you buy it for?

And that way, you know, I’m not an accountant, but I can least somewhat look at what kind of gain you potentially have. Now there are times where people already talk with their accountant and they’re like, yes, I need to do one. They’ve already told me or no, I don’t need to do one or maybe so, but, I like to get a really good idea of what, you’re going to be selling that way. can say, okay, yeah, it probably makes sense to do one. But if you’re at a stage in life or

You have some properties and you’re like, you know what? I just need the cash to live on. I don’t want to be a landlord anymore. I don’t want to play this game anymore. Uh, then, then yeah, then, then it doesn’t make sense to do a 10 31, right? Um, but just be prepared that you’ll be paying a lot in taxes. Cause remember when you exchange, let’s say you exchange your property now, and then in 10 years you exchange that tent, that, that same property again, those gains that you had originally carry over to the next property and over and over until.

Dylan Silver (09:46)
Yeah

Aristotle Kumpis (10:08)
you sell the property. So the more you carry those gains over, the more you’re going to have to pay taxes at the end of the day. the goal is to really not sell the property. So if you’re not forced to sell it or you don’t want to sell it and upgrade to something else, then you have to cash out and have to pay the taxes. or if you, for example, if you’re flipping homes, right, this does not work for people who are flipping homes. People who are doing, yeah, you cannot do a 10-30-1 exchange on a flip. IRS requires

Dylan Silver (10:29)
Hmm.

Aristotle Kumpis (10:34)
Well, I should back up. There’s not really a timeframe on how long you need to hold the property for before you do an exchange, but most accountants and CPAs will say two years minimum before you can do an exchange. So if you’re flipping a property and six months or 12 months goes by, you want to sell the property, probably not going to be a good idea to do the exchange. So that’s one instance where an exchange would not make sense to do that. But to answer your question as well, cash out refining answers and exchange. I think really the main question is,

Dylan Silver (10:54)
Okay.

Aristotle Kumpis (11:03)
Do you intend to buy another property with the proceeds of the sale of this property? And if you say, yeah, probably I’m going to, and you should look at your intent on anyone exchanging that.

Dylan Silver (11:13)
Now, when you’re doing a 1031 exchange are effectively 100 % of the profits being put into the next property. Are you able to withhold some of that for yourself as an owner draw?

Aristotle Kumpis (12:00)
Yeah, that’s a really good question. We call it a partial exchange and yes, you can do that. So let’s say you have a proceeds of $100,000 in your exchange account and you want to buy a property that requires a down payment of $60,000 and use that, well, let’s just say 60,000 with closing costs. You have another 40,000 in your account still and you’re like, you know what? I just want to cash out and not exchange that. You could do that, but just know that you have to pay taxes on

Dylan Silver (12:24)
Okay, okay. You mentioned and I want to go back to an earlier point you said accountants may say you you have to hold this for two years right in order for this to work out. If folks are doing like what is colloquially known as like a slow flip if they’re going to put tenants in there and let it appreciate for two years let’s say at the end of that two year time frame then they’ll go to sell it banking on the appreciation. That sounds like a strategy that could potentially be a good match if you’re looking to

take advantage of value-add rehab and ⁓ a flip while also taking advantage of 1031.

Aristotle Kumpis (12:58)
Yeah, I’ve actually never heard that slow flip term before. least I don’t think I have. So that’s pretty cool. But yeah, if you are, if you are, this happens a lot too, right? Maybe you go in to flip a property and then it’s just like your rehab costs are way out of line or maybe bad time of the year or the market’s just not good in that city for whatever reason. You can’t sell it. You don’t want to sell it. The best thing to do is yes, rent it out, hang on to it for a couple of years. Make sure you claim the income on your tax return for those couple of years. And then when you go to sell it,

Most likely do a 10th of a number exchange and then yeah, that would qualify. Absolutely

Dylan Silver (13:32)
I want to pivot here and ask you about investing from out of state in some of these markets, right? Alabama, Tennessee. I saw you on a different podcast talking about really the sunbelt in general and working with investors who are looking at properties in Texas, for example. When investing out of state and especially doing 1031 exchanges where there’s some time deadlines where folks have to meet, what are some typical bottlenecks or

things that investors should be aware of when they’re going through this process.

Aristotle Kumpis (14:02)
Well, there’s not really any bottlenecks I would say from going from different states, right? So our company, Excel 1031, we operate in all 50 states, right? So you can have a property wherever. I have a client right now that’s selling a property in Virginia, and she lives in California. She wants to buy something in California where she lives, right? So we can go either way. But I would say a lot of people who have properties in high price point markets, like

Denver, Austin, Los Angeles, San Diego, New York, et cetera, Miami. Those people are looking at other options. like, I can get, my purchasing power goes a lot further in another market like Ohio or Indiana or Texas. Or maybe they’re one exchange because the landlord laws are more favorable from where they live. I’m in California where the, in California, the landlord laws are terrible. I hate to say that, but they’re very lousy.

They make it really hard to evict tenants if you have to do that here. And so we have a lot of people who are selling property in California and looking at other options. So there’s not really any bottlenecks really. I would say just have a team in place really where you want to invest. So if you are looking at investing in Dallas or Houston or San Antonio or Cleveland, Ohio, ⁓ make sure that you have someone in place there that knows the market, that knows investment property.

before you even sell your property because then you’ll know, okay, hey, I have a great idea, maybe fly out there as well, check out the areas and tour. And that would really help alleviate a lot of stress when you’re selling your property. That way you kind of know where to go. If you’re just selling the property and all of a sudden you have to identify your property and you’re like, I think I’m gonna go here or there, I’m not sure, it will definitely be more stressful.

Dylan Silver (15:45)
What’s the time deadline that people have to be aware of that they have to find the new property to allocate the money within?

Aristotle Kumpis (16:33)
Yeah, so timeline. So the IRS gives you 45 calendar days from the day you close on your relinquished property, the property you’re selling. So 45 calendar days, a month and a half, if you want to call it that, to identify your new property. We send all of our clients an electronic form that they would write the addresses down. And that would be for the replacement properties, whatever addresses they want or properties that they want to replace. It’s pretty simple.

And then you have a total of 180 days from that day of close when you close in your property to close on all your properties. So it’s 180 days for the entire exchange and everything needs to be closed by that time. I would say a lot of people get held up on the 45 day deadline, right? They’re like, my gosh, I don’t want to do an exchange. I’ve had people say this, like they don’t want to do an exchange because they’re feared that they’re not going to find something. And I tell them, hey, at least try because if you don’t try,

Uncle Sam’s going to make you pay a lot of taxes potentially, depending on what you own. So least try to do the exchange. If you fail before you even try, then what’s point? You got to try and identify something. We actually have lot of strategic partners at Excel 1031 that offer properties out of state. So if people are going to go to Texas or the Midwest or Florida or wherever, we’ve got a lot of partners that offer stuff off market, on market, you name it. So finding a property shouldn’t be a problem, but

Dylan Silver (17:40)
Hmm.

Aristotle Kumpis (17:51)
It does really, when people are trying to sell a property before they even list it and they want to do an exchange, they’re kind of a little timid about that. like, I’m not so sure because I don’t know where to go. only got 45 days to identify something, but usually people are going to be able to find something.

Dylan Silver (18:06)
I’m sure you’ve got lots of stories about 1031 exchanges gone right. And then also some hairy deals. Bonus question for you, know, when folks are looking at 1031 exchanges, is there anything that they could do that would really be not advised or could potentially throw a wrench into the process?

Aristotle Kumpis (18:14)
Mm-hmm.

yeah, there’s lots of different ones. would say, I would say Tidal would be investing and Tidal is a big one and people don’t think about this ⁓ because the IRS requires the taxpayer who is selling to be the same taxpayer who is buying. So if Joe Smith is selling a property and all of sudden the property is in his uncle’s name,

Dylan Silver (18:35)
Yeah, I know.

Aristotle Kumpis (18:48)
Why? Like you can’t do that. The IRS will probably audit you or you’ll get audit. You could get audited for that. And if they audit you, have to explain that, right? So it has to be the same name. Now it’s different if you go from Joe Smith to, you know, 123 Main Street where Joe Smith is the single member on that LLC. That’s completely fine. But, but ⁓ where it gets really hairy is title. So like another example on title would be partnerships, right? Let’s say there’s two partners in an LLC. One wants to do an exchange and one doesn’t.

All right, you got to figure that out before you actually, before you go into contract. You should have all that resolved, how that’s going to work out and talk with title before you’re to do lot of Because when you get down into the wire, it’s just happened many times where people are like, Hey, I’m closing in two weeks, but my partner doesn’t want to do an exchange. I’m like, okay, that’s going to be really tough to deal with that right now. And so yeah, so I would say, figure out, figure that if you have a complicated situation, talk with a qualified intermediary.

Dylan Silver (19:36)
Yeah.

Aristotle Kumpis (19:43)
before you sell the property in advance because those things can be really tricky and time consuming if you don’t.

Dylan Silver (19:49)
We are coming up on time here, Aristotle. Any new projects that you’re working on and then what’s the best way for folks to reach out to you?

Aristotle Kumpis (19:56)
Yeah, so as far as my contact information, I appreciate you asking me. So my cell phone number, if people want to call me anytime or text me, it’s 310-467-8122. And my email address is my first name, my first initial last name. So it’s AKUMPIS at Excel. That’s E-X-C-E-L1031.com. You can reach me there. Our website, excel1031.com is our site.

Any new projects I’m working on, me personally or just for work?

Dylan Silver (20:28)
Either one, either one.

Aristotle Kumpis (20:29)
Yeah, well, not really. We well, I would say we are we just read what we’re revamping our website, which is great. It’s always great to get a refresh. We’re actually updating. We have a calculator capital gains calculator on our website that we just updated. I think it should go out this week and it’s going to you slide the numbers back and forth so you can kind of see what your capital gains could look like, which is kind of cool. Yeah, so that should be after running and then personally. Yeah, like I said, I mentioned.

You know my property, I have a property and I have several in Alabama, but I have one that I’m eyeing on selling because you know it’s got a lot of different maintenance and I’m going to take that property, it’s probably worth about 180, 170 and I’m going to probably purchase two new properties with that. So I’m going to basically increase my net worth, probably double my net worth by selling that and getting into two new ones, new construction potentially.

Dylan Silver (21:17)
Well,

congrats on that, Aristotle thank you so much for joining us today. Thanks for your time.

Aristotle Kumpis (21:22)
Yeah, appreciate it. Thanks for having me on Dylan.