LUR Michael | 1031 Exchanges


While taxes are an integral part of owning a certain property, they are, naturally, one of the parts that property owners like the least. But if you know where to look, there are existing loopholes, totally legal, that you can go through in order to help you reduce the burden of taxes on your part such as 1031 exchanges. Michael Brady and Alex Shandrovsky represent Madison 1031 as its Executive Vice President and Business Director respectively. Lisa Hylton speaks to Michael and Alex about these so-called 1031 exchanges, and how they will lighten up the burden of property ownership on your part. If you’re looking for a way to defer the taxes on your properties, look no further!

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Exploring 1031 Exchanges With The 1031 Exchange Guys, Michael Brady And Alex Shandrovsky

I am excited to have on my show, the 1031 Exchange guys who are here to talk about what is 1031 Exchange and all of the legalities to successfully execute at 1031 Exchange. My first guest is Michael Brady. Can you go ahead and introduce yourself?

Thank you for having us on, Lisa. My name again is Michael Brady. I am an Executive Vice President for Madison Exchange. We are a qualified intermediary for 1031 Exchanges. My background is that of a real estate attorney. I’ve been practicing law for years, predominantly doing real estate, corporate, and some estate planning transactions. I started working as a qualified intermediary in 2005 and had been doing it pretty much ever since helping taxpayers defer over $1 billion in taxation during the course of my career.

My second guest is Alex Shandrovsky.

My background is I was a small business owner. I ran a small catering company in Silicon Valley that grew up to multimillion-dollar businesses. My interest in real estate is coming from a place of interest in creating passive income which is very different from a very active small business owner. Mindset real estate is fascinating to me. I have the privilege of working in the business development for 1031 Exchanges. I worked hand-in-hand with Michael being able to educate the public about the value of building this amazing wealth through 1031 Exchanges.

What was your business before?

I ran a large catering company, so specifically focusing on enterprise clients like Google, Airbnb and Facebook. We’re one of the largest sushi producers in San Francisco.

You ultimately sold your business and started a new one?

I sold an interest in a partner and then got an opportunity to be able to start working in this great company.

To get started, I don’t know which one of you will take this first question. I’m sure people are wondering what is a 1031 exchange. Can we dive into that one?

When you own appreciated real property, you bought something several years ago and it’s worth a lot more than it was when you purchased it, you have a capital gain. That’s your profit. If you were to sell the property, you would have to pay taxes on that depending on where you’re located and what your state income taxes are. The taxes could be as high as 30% or more when you sell the property. By doing a 1031 Exchange and swapping that property for another investment property, you get to defer the taxes. It’ kicking the can down the road and you’ll be able to reinvest those tax dollars rather than paying them out to the various levels of government. That’s what a 1031 Exchange permits. This is not some loophole that’s current. It’s been part and parcel of the Tax Code since longer than many of us have been around. It allows people to keep their money working in the economy. That’s the justification for this tax deferral concept.

To tag on to that, that is the US government incentivizing investors to keep investing. As they continue to keep their money out there working, then they give them good tax advantages for doing so. That brings me to my next point, I’m curious about why someone in the early stages of their investing journey would want to stick around to read this blog to learn about 1031 Exchanges.

There’s such a great host, that’s the most important thing. That’s a good reason. The second reason is that we’re assuming that you are an investor who is looking to have your property appreciate and value. If you are looking to appreciate and value of your investments, that should not be the real estate investment business. We’re talking to the individual who is looking to invest long-term in real estate and sees that his investments are overtime over the next 3, 4, 5, 6, 7 years are going to appreciate. You’re not a person who is looking to flip in a home and switch it over in 3 to 4 weeks. We’re talking to the person who’s doing long-term investment, who is looking to the side-by-side with his goals of creating W-2. He has an income that’s consistent that’s coming in and it’s having slowly purchasing these small properties and combining them together. When your property is appreciating value and you’re going to look to the point of, “I have an option where I’m looking to move.” Those properties no longer do what I want it to be active.

LUR Michael | 1031 Exchanges

1031 Exchanges: When you own appreciated real estate property you bought several years ago and it’s worth a lot more in the present than when you purchased it, you have capital gain.


The small investor is quite involved with the property. He’s going to say, “I’m leaving California. I got a great job in Kansas City. Maybe it’s best for me to want to have these properties next to me as much as possible. I’m going to want to sell off the properties I have.” Perhaps I come across Lisa and she has a great opportunity for me that I never expected. This is the type of opportunity that I want to reinvest into. What I want to do is I want to sell the properties they have and put the money in into this new opportunity. In those cases, you got to sell a property. The idea here is that it’s much better for us, the power with the dollar is much more powerful than several years down the line. What you’re doing is by saving and deferring taxes now, what you’re allowing yourself to have the power of that dollar invested into a new property, through a compound interest or being able to leverage it to the new property. That’s all going to happen with a 1031 Exchange. If you have appreciated the property and you were hard on making sure that you made the right decision and then you want to reinvest that money. You do not want the government at that point to take 30% of those profits. Not only is it something that you can reinvest, but you can also leverage against debt to take on the larger investment opportunity.

For instance, if that investor has decided to sell their property, maybe they bought a single-family for $100,000 somewhere in the smiles state in the South. They’ve held the property for ten or fifteen years. They’ve been able to significantly pay down their mortgage because they aggressively went after that. They’re experiencing that if they sold the property that they would be able to sell it for $120,000, $130,000, $140,000, or $150,000. What they’re looking at is potentially anywhere from $30,000 to $40,000 in gains. If they took that money, paid off the loan and then rolled it into a new property, how would the process work? Can they sell and then roll the money in? Are there things that they need to put in place in preparation for executing a 1031 Exchange? Can you talk about the differences between the two? I didn’t realize that there’s a direct swap deferred versus a deferred.

Section 1031 is written for direct swaps. If you and Alex each had a property that the other liked and they were worth about the same amount of money and you decided to trade the deeds, that automatically is a 1031 Exchange. It’s a direct swap and that’s what the statute was created for. That doesn’t happen that often. I’ve handled a handful of those during the course of my career. The good news is if you’re doing that, you don’t need a qualified intermediary, which is what our company does, but by and large, you will need a qualified intermediary. Most people are going to sell to one party and then buy from somebody else. In order to make this a swap for tax purposes, you need something called the QI, the Qualified Intermediary that you will swap with.

For tax purposes, the taxpayer is giving us as the QI their property. We then sell it, take the proceeds from that sale, buy a property from somebody else so that we can give that property to the exchanger, the taxpayer, in exchange for what they gave us. That’s the tax structure of the transaction. That will be very cumbersome if you had to do that. Because then you’d have two deeds on the sales side and the purchase side, which would mean four total sets of title insurance policies, which can be very cumbersome. Our affiliated title insurance company would love that transaction. Four sets of premiums is a nice deal. Perhaps, you would have double sets of recording fees, transfer taxes and all those other things. It’s permitted under the regulations that all the taxpayer needs to do is assign their contracts of sale to the qualified intermediary and the money has to flow through us because if the taxpayer touches the money, it’s a taxable transaction. Instead, the money is kept out of their hands and they receive a property for a property, then it’s an exchange and they can defer the taxes.

What makes someone a qualified intermediary?

When I first heard the term and people who have seen my seminars are going to laugh because I say this all the time. I thought qualified meant that they were qualified, that they had some special education, that there’s some licensing. They got the good housekeeping seal of approval from the IRS saying that they were qualified. What it turns out is that to be a qualified intermediary in any particular transaction, you cannot be a disqualified person. A disqualified person or the treasury regulations is any individual who is an agent of the taxpayer, the person who’s looking to defer their capital gains taxes. That will include the taxpayer themselves. They cannot be their own qualified intermediary. Any lineal relative of the taxpayers so their parents, siblings or wife cannot be their qualified intermediary. Any other agents like the real estate broker in the transaction cannot be their Qualified Intermediary. Their attorney or accountant, if they’ve given them tax or legal services in the two years prior to the sale of the relinquished property, cannot be their qualified intermediary. Any entity in which the taxpayer owns more than a 10% interest. The taxpayer or any of their family members in aggregate on more than a 10% interest cannot be a qualified intermediary. That leaves anybody else.

You have to do some due diligence when you’re selecting a qualified intermediary. You want to look for a couple of different things. Number one, you want to make sure they know what they’re doing. For instance, our company is devoted exclusively to doing 1031 Exchanges. We have three attorneys on staff that just do 1031 Exchanges. We have three Certified Exchange Specialists on staff. I happen to be an attorney and a Certified Exchange Specialist. Certified Exchange Specialists or people who take a test through the Federation of Exchange Accommodators, that’s the industry group for 1031 Qualified Intermediaries showing that they have a minimal level of competence in tax-deferred exchanges. We get certified as an exchange specialist. You want to look for that level of expertise. Number two, you want to ask questions about where the money goes in between because as an industry, we handle billions of dollars in proceeds on behalf of our clients. Our program set up bank accounts for our exchanges. There is their escrow accounts. On our larger exchanges, we set up a segregated account that bears the taxpayer’s name and tax ID number, but it isn’t escrow account. It’s not invested in something risky.

Treasury wouldn’t be risky, but they’ve not invested in anything as stocks, bonds or somebody’s pet project where they are going to start a business. You want to make sure that the money is going someplace where it will be available when you buy the replacement property. Lastly, you should look for institutional size as well. We’re part of a much larger company. We’re part of a mass in commercial real estate services which includes a title insurance company, which is one of the largest independently-owned title insurance companies in the country, Madison Title. They insure several billion dollars of title insurance transactions every year through all the major underwriters. We have a cost segregation company who you’ve worked with. We also have a lease pro and due diligence company as well. We’re a company of some size so you know we’re going to be there at the end of the day. That’s the type of questions you should be asking and selecting.

A 1031 exchange allows you to swap your property for another investment property and defer the taxes. Click To Tweet

Let’s say the client have now selected their qualified intermediary. Before they select them, they had their property and they were thinking about selling. What are the rules surrounding the 1031 Exchange itself? 

This is one of the things that is important to understand which are the timelines. They’re associated with 1031 Exchanges. 1031 Exchanges are a great opportunity. The government is giving you the ability to say, “You’re doing so well. Would you consider staying in the market, reinvest you’re hard-earned, depreciate dollars into the market but there are some limitations?” There are two important timelines. The first thing that you need to make sure that they do is they have selected the QI before the time of the sale. We are happy to be speaking to you and your audience because you might be thinking in several months, in a year or two years, it’s never too early to start having a conversation about being educated to make the right choices. Before you are going to complete the sale, you have to have identified the qualified intermediary who is going to be holding the funds between the sale and the purchase. The second thing is this 45 and 180-day time period. Forty-five days is what you have from the time of closing to identify the properties that you’re going to replace your process with. You have sold the property, the QI and that was holding those funds in escrow and you want to reinvest those proceeds into the new property. Anything you do not reinvest into the market is going to be considered boot.

Why is it called a boot? I have no idea. I’m sure that there’s some fabulous reason for it. Maybe the person who thought it had a fascination with shoes. Maybe it was Nike sponsored, I don’t know. The point being is it’s called boot and what’s more important than what the name is and what’s going to happen is that whatever is not reinvested is taxed. If you sold a home for $150,000 or $200,000 and you have chosen to only reinvest $150,000, you are going to have to pay $50,000 on capital gains tax. Whatever you pull out all of the market, you have to pay taxes immediately. That’s why it’s very important to reinvest everything you can. The 45-day period is an identified period where you have opportunities to choose three properties of any value. You have $200,000 you sold, you could identify three properties of the same amount or higher that you’re going to choose to purchase 1, 2 or 3 of those properties. If you’re choosing more than three properties, if you want to identify 4, 5 or 6, you’re going to have to identify up to 200% of the proceeds. If you want to choose more than three properties as to be up to 200% of the proceeds. That’s quite rare.

Most people will always speak about them doing the 1031 Exchange is crucial to understand that you want to do some due diligence before you do the sales. You want us to look at the place where you’re thinking about moving. Perhaps you’ve got that new job that you want to be working in, new location, you’ve moved your family, you want to retire. Also, you’re looking at how you want to structure your thought process of how you want to reinvest the money. You want to make sure looking at those properties in advance because you have 45 days to identify and then it’s not business days. The government does not care if your kid is having a toothache. It doesn’t care if it’s Christmas. That’s not going to make a difference. Forty-five days of the time closing and then you have 180 days from the time of the sale of your property to purchase on your replacement property. Those are two timelines that are important to know. Once you’re able to work within those timelines and were able to successfully complete the exchange then the proceeds are going to be your investments in new properties and you’ve been a defer capital gains tax.

A quick question on the 200%. Let’s say someone is in California and they’re selling one of their homes that they’ve held on for a very long time. They’re getting $1.2 million to $2 million for selling this home that they’ve held for twenty years. They are looking at Florida and they’re going there to buy properties. Because they’re coming into a whole lot of money, they might identify five properties in Florida that they want to buy. Are you saying that the purchase price of those five needs to be 200% of the sale? If they’re getting $1.5 million from this house that they’ve held for twenty years, they need to then put that into five properties that total $2 million?

No, the total amount that you can identify is up to 200%.

Let’s take simple numbers. $1.5 million is too confusing for me so we’ll do $2 million. If they sold for $2 million and they identified five properties, they can identify more than three properties up to $4 million total value. If they exceed that then there’s a different rule that applies. It generally doesn’t apply to most taxpayers. That would be for somebody who was selling one large property and plans to buy a bunch of smaller properties.

Moving on from that, are there some factors that could lead to a failed 1031 Exchange? 

The biggest factor is we do get people who come to us at the last minute, literally calling us from the closing table saying, “We heard about this 1031 Exchange and we want to do it.” They had planned to pay taxes and somebody told them at the last minute. We can handle that exchange. We don’t particularly love doing those transactions, but we can get documents out very quickly. The problem is their clock starts to tick and they haven’t started shopping. Pretty much nationwide, it’s a tough market to find good real estate. Cap rates are pretty much compressed all over the country. You’ve started shopping and you only have 45 days to find a property. That’s a month and a half. That’s the biggest reason, people fail to identify property within 45 days.

Even if they do, when you go into this last minute. You rush and you throw down three properties on this form that you send us within the 45 days, you’re not under contract. You have to negotiate the contract. You have to do your due diligence on the property. If anything comes up to throw those properties off track, if there’s an environmental problem on the property or the seller has title issues that can’t be remedied within 180 days. That’s another reason that people tend to have their exchanges fail. Those are the biggest issues. I’ve also seen people that fail to qualify for a loan also. You want to do your homework and prepared as much as possible in advance.

LUR Michael | 1031 Exchanges

1031 Exchanges: Federal estate tax thresholds are normally very high. It only applies to the top 1% of the population, basically – even less if you look at the actual figures.


I would jump on that last thought. I had someone and we were able to help him tremendously out. He called in a panic where he used different QI and he was having a challenge. This could be very relevant for your audience. He had a property that he purchased in Los Angeles. He was selling it and moving over to Phoenix and doing a 1031 Exchange there. The challenge was that he’s been out of work for several years. At the time of the purchase of the original property, he had enough W-2 income to show and qualify for income. For the new loan, they had to apply for, he didn’t qualify. Those things have to be done in order to ramify that. It’s crucial to know these things as well. The proceeds that he’d come from a sale got to pay off your loan, but because you’re trying to exchange the same amount of proceeds of the sale, you’ve got to take on new loans. You want to make sure you can qualify for the replacement loan.

Is there a limit to the amount of 1031 Exchanges an investor can do?

There’s no limit. However, this is designed for a property that you’re buying and holding. You don’t want to do the fix and flip. You don’t want to do buy a property on Monday, you’re selling it on Friday then you buy another property on Tuesday and so on down the road. Doing a bunch of exchanges off of the same initial sale in the same year is a no-no. You can continue to do exchanges during the course of your lifetime. You can sell the property that you’ve held for two to ten years and you can buy another one. A couple of years later, do another one and another one. During the course of your lifetime, keep exchanging up and up. If you were to pass away owning appreciated property, the good news for your estate is that it gets a step-up in cost basis and you’ve accumulated capital gain up to the date of your death would disappear. That would be no capital gain tax if they sold it the next day. That’s called a step-up in basis. We referred to that as swap until you drop because you’re continuing to exchange. At the end, when you drop dead, your estate walks away with tax-free money, although you do have to pay attention to estate taxes. That is something that I always caution people. We don’t worry too much about estate taxes because the thresholds are very high federally. You have to look at estate taxes also to make sure you don’t want a foul on that or have a tax issue there.

I know you’re not an accountant. This question would dive into the realm of the accountants. There are estate taxes that are tripped up once the value is over a certain amount. Is that what you’re trying to say?

The federal estate tax thresholds are very high. It only applies to the top 1% of the population. It was even less than that when they looked at the actual figures. After the tax cut JOBS Act of 2017, you can give away millions of dollars without having to worry about estate taxes. Various states have lower thresholds. California and New York do. You always have to pay attention to that. Those taxes tend to be a lot lower than the federal tax rates are but still, it’s something that you don’t want to be surprised by.

As people think about the fact that they may have bought a property with partners. We’re slowly moving into the realm of the syndication side. Before we get to that side, talking about people who may have gone into a deal as a joint venture and one of the partners wants to do a 1031 Exchange, the other doesn’t. Is that possible where it can be successfully done if both parties are not on the same page?

You’re going to want to look at what the actual structure of that is. A joint venture is an amorphous term that can encompass any bunch of different relationships. People who want to invest in real property together do one of two things. What they do is they set-up one limited liability company and they buy it in the name of the limited liability company with the two investors being partners in that entity. They’re both members of that entity and taxed as a partnership. That’s the most common structure that you see. You could also buy it as Tenants in Common. Meaning you each buy it in your own name. Bob and Mary will each be on the deed of the property.

If that’s what we have, we have a Tenant in Common structure, it’s very simple. When you sell the property, Bob and Mary are selling different property interests. Bob can sell his interest and go do a 1031 Exchange. Mary can cash out. She can take the money directly from the closing of the sale. That’s not a problem. If we had Bob and Mary LLC, we have to have the same taxpayer on each side of the exchange. The Bob and Mary LLC can do a 1031 Exchange and stay together. If they want a separate, they’re going to have to get out of the limited liability company at some point. They do this before they close on the relinquished property. The Bob and Mary LLC would deed the property, 50% to Bob and 50% to Mary as Tenants in Common. As Tenants in Common, they can go their own separate ways.

The risk of that is that the property has to be held for investment rather than resale to qualify for 1031 Exchange. Bob and Mary dissolved their LLC five minutes before closing, it could be challenged as saying that they as individuals have not held the property for investment. The good news is the Federal Government does not seem to be challenging those transactions in any meaningful way. We’ve not seen audit activity on the Federal level. We’re not saying it could not happen, but we’re not seeing it. The bad news is in that vacuum of Federal activity, the states have gotten more involved. California very aggressively looks at 1031 Exchanges and they have looked at what we call the drop and swap. You drop out of the partnership and then you swap the property separately. They have challenged those transactions. If this allowed a bunch of them, they had a recent tax court case in California where the court permitted a drop and swap transaction.

The taxing authority in California does not necessarily respect that decision. They’ve indicated that they’ll continue to look at these transactions, but it’s important to note that there’s one good favorable tax court opinion in California. Other states have taken up the mantle as well. We’ve heard anecdotally, New York is starting to question these transactions. We don’t know how that’s going to play out. There is some risk if you’re doing it at the last minute. You should do it with some advanced planning. Drop out of the entity before you even put the property on the market if possible so that you’re selling the property truly is Tenants in Common. That’s pretty the safe answer. That’s the most common structure. There are other structures but they get to be somewhat complex.

Doing a bunch of exchanges off of the same initial sale in the same year is a no-no. Click To Tweet

We’ve been focused on single-family homes and/or one or two investors. When we roll into the arena of syndication and you’ve touched on this with the LLC. To focus on it, how to execute a 1031 Exchange for syndications when it’s set up as an LLC?

It’s a different flavor of the same problem. You have to have the same taxpayer on both sides of the exchange. What you cannot do is have 1031 investors, sell their property and then buy into the limited liability company with all the other investors. That does not work because they’re not buying a property interest, they’re buying a partnership interest. That specifically was excluded under Section 1031 before 2017, as part of that “other property” other than real property does not qualify. We cannot buy a partnership interest. When I talk about syndication, you’re talking about a bunch of people were buying a property together. The structure is you have somebody who will call the syndicator who is in charge of the project. They have found the property, they are lining up the investors, they’re going to manage the property while the property is being held and they’ll be responsible for the sale of the property. The syndicator invests little or no money into the actual acquisition.

They are going to get an outsized return for whatever they invest. They’re getting so-called sweat equity in the project. They do that in a limited liability company. The problem you have is if the investor wants 1031 money in their project, they cannot bring it into their syndicated entity because it’s a partnership, not a property interest. They would have to bring that person in as a Tenant in Common. They would buy the project. It would be, let’s say 75%. It would be owned by the limited liability company and 25% would be owned by our 1031 investor. I’m going to throw out one quick legal citation. You want to look at Revenue Procedure 2002-22 if you’re setting. It provides loosely some guidelines for structuring a Tenant in Common relationship.

One of the important things is that the Tenant in Common investor has to receive returns that equal to an investment in the property. If he puts in 25% of the equity, he’s got to get 25% of the profits. Our syndicator is looking to get a piece of that because they’d put the sweat equity. That syndicator could still get a management fee, which should bear a proportion of relationship to what the services they’re providing. They could also be a manager of the 1031 investor’s limited liability company, which would give them some control over decision-making and things like that. You would want to hold it in that structure for a period of time. Several years down the road, you could then bring to indicate the 1031 investor into the syndicated entity at some point after his exchange is “old and cold” and passes the held for tests.

In this scenario, when you’re doing a syndication and you have set-up a TIC, correct me if I’m wrong, it sounds to me that these syndicators will need to make sure that they’re invested in the deal in proportion to the portion that they want to take a piece of the deal. They need to be invested 10% if they want to have to receive 10% of the deal. If they’re going to do a TIC because they are going to need to give the Tenancy in Common their portion in direction to what they have invested.

To elucidate some of the points. What Michael is sharing is the percentages could be very different within the 75% of the TIC. In a 1031 Exchange, an investor is only going to purchase 25% Tenant in Common interests. That 75% could be distributed in any way that those investors are interested in. Secondly, you could set up a structure where the syndicator’s gain is being paid a management fee from the 25% interest of the 1031 Exchange investor. The crucial thing we want to highlight is that we work with syndicators all the time. You want to have a conversation with the qualified immediately way ahead of time so these deals can be structured in a way that will be both beneficial to you as a syndicator because you are putting in the sweat equity. You are creating the deal. You’re creating that level of activity, a level of investment. You’re doing this to be acknowledged or rewarded. It’s very different from a passive investor. At the same time, you don’t want to lock yourself out from the benefits of having 1031 money flow into your deal.

Specifically, a 1031 Exchange is a great investor because they have a very limited amount of time to identify an investment. They’re not going to continue pushing off their investment opportunity. They’re not going to continue renegotiating the deal continuously. You are having a person who was on a time crunch. They look to invest all their funds into this. What we see with 1031 Exchange, a lot of the times individuals are moving into a triple net property or more of a passive investor property set up. There could be a great, excellent candidate for syndicated cash but the syndicator needs to be able to plan ahead to set it up correctly so that 1031 Exchange is not going to fall apart. At the same time, the syndicator himself is going to have the benefits of that investor money and his work as sweat equity could be acknowledged because I, as a small business owner in the past, know what sweat equity means. You want to make sure that you acknowledged for that.

In addition to the qualified intermediary, the one thing you should also do is any syndicator should get their good team behind them. They want to have a good accountant behind them that understands these issues and can help them structure them as well as a good real estate attorney who can navigate the waters for them.

One other thing that I wanted to touch on and I wanted to dive into is as individuals come out of syndication. When the syndication matures and passive investors as well as active investors come to the end of the life of the investment. Similarly, they’re going to need to have that option if they’re in an LLC, does everyone need to move into the next investment in order for a 1031 Exchange or no, they’re going to need to then do the split up that you’re talking about?

LUR Michael | 1031 Exchanges

1031 Exchanges: Exchanges are a good investment strategy for people who are purchasing a home for the first time as an investment property where part of it is their primary residence.


You’d do a Tenant in Common agreement. This is as long as it’s a Tenant in Common relationship, then you could take your percentage of ownership and reinvested because you own that percentage. They can choose to do whatever they want. It’s like in any partnership that is split into a Tenant in Common. The syndication person and the syndicators, there’s an agreement between all parties that, “We’re together on this. Moving forward, we know that we’re coming in for a 5 to 7-year relationship on this deal, but that’s going to continue on to the next deal and the next deal.” When you are as an investor talking to a syndicator, make sure that you have a clarity about what their long-term vision. Are they interested in reinvesting after they exit from the deal in 5 to 7 years? They can do that through a 1031 Exchange. If your plan is to do a reinvestment, to do that without the benefits of 1031 Exchanges is a huge loss because you’re losing that power of both leverage and the dollar that you have by paying them out to the government.

If you’re any syndication exit strategy, you want a plan those preferable years in advance. You don’t want to do it on the eve of closing. That’s important to do that early on in the process.

Would you say that’s something that people are going to have to put as a part of their budget? If they’ve set it up as an LLC and then on the backend, they need to deal with some people who want to roll, some people who don’t want a roll. They’re going to incur additional legal fees to set up these types of entities to make it happen.

The legal fees are always something you should budget for. Cost should not be exorbitant until they’re not inconsequential. You might want to include that in your budgeting items.

In terms of the cost itself of a 1031 Exchange, people are often surprised to hear the positive sense that the cost of a 1031 Exchanges on a simple forward exchange is going to be around $800. It’s accessible. You may not be searching, could I find their place in property or not? At the very least, you should not be keeping them back of their mind that even if the exchange does not work through, the investment is around $800. It’s reasonable to say it’s worthwhile saving potentially hundreds of thousand dollars of deferred taxes burden by paying $800 now.

To be clear, someone might be holding a single-family turnkey that they have held as an investment for 5, 10, or 15 years and have decided to sell it. They might say, “I want to take this money and move it into syndication.” In that case, they’re going to need to talk with the syndicator about setting up that TIC, the Tenant in Common entity that they would then bring their money into.

That’s a discussion to have early in the process. Preferably before you sell your property, if possible.

For those people who are reading this, they should be asking, Lisa, “Are we going to be able to put the 1031 Exchange money into the syndication?” You want to do that the way ahead as you plan a strategy to move up the investments.

In that case, would the syndicator be setting up the TIC essentially?

It varies. You’re going to need the attorneys involved. Between the syndicators and the attorney and the attorney for the investor, it depends who works to set it up.

I have not heard that question before so I appreciate, I was able to see that. Being an auditor helps. Mike, if one of them makes it the last minute if you’re setting up the TIC to accommodate the 1031 Exchange investors, shouldn’t the structure already be a TIC structure at the beginning of the syndicator when they go into the deal?

That’s what I was talking about, about going into the deal as a syndicator. Going into a syndicated deal with the 1031 investor, that could be set up to the last minute because it’s on the acquisition. You don’t have a relationship until you close. What you’re talking about on the exit strategy, that is going to be the syndicated as attorney arranging that and setting up the TIC to get out of the syndicate. To come in, it’s a conversation between the syndicator’s attorney and the investor’s attorney.

Thank you both. This brought a lot of good information to me, to the audience who’s curious about 1031 Exchange. To recap at a high level, we started out with what the 1031 Exchange was of which you went into the definition of that. We then moved into the timing and the procedures at which and the rules as well as defining what a qualified intermediary was. We ended this conversation with wrapping up on how to exit an LLC that you might be in and moving into rolling into a 1031 into another one and also accepting 1031 money into syndications that you might be interested in getting into. Is there anything else that you feel that the readers would benefit from knowing when it comes to 1031 Exchanges that I have not covered?

One thing that might be popular for your audience to consider that it’s happening in San Francisco is that you might purchase a property and they’ll start renting out bedrooms where they used to live in the property. That could happen whether it’s through Airbnb for example. Where you have a four or five-bedroom home in San Francisco or twelve bedrooms or if you’re in Charlotte with 50-bedrooms. You live in two bedrooms that they gave to the family. What you’re doing is you’re renting out your downstairs in-law apartments or you might be renting another bedroom. It’s important to think about what that structure looks when it comes with 1031 Exchanges.

We see those quite frequently and that’s a good investment strategy for people who are purchasing a home for the first time as an investment property where part of it is their primary residence and part of it is an investment property. In that case, they could do their estate benefit of both two very important Tax Codes, which is going to be a 1031 Exchange. If you’re single, you have an exemption for $250,000 on the capital gains of your primary residence. If you’re married, $500,000 and at the same time, anything above that when you’re going to have those other bedrooms, those can go through a 1031 Exchange. What that means is if you are having $1 million home that’s raised areas and value of $2 million and you have a $1 million of capital gains you’re looking to pay. The 121 Exemption is going to allow you if you’re single $250,000. If you’re married to $500,000 of exemption for capital gains, not deferral. That’s something we definitely would advise. The rest could be deferred through the 1031 Exchange, assuming that those rooms were held for the purpose of not a vacation or you would be living in the half of the year and the half of the year you’d be renting it out.

It's important to look at what a structure looks like when it comes with 1031 exchanges. Click To Tweet

It’s primarily set up for Airbnb. I’ve had friends in San Francisco who I can stay by and they have downstairs three Airbnb bedrooms and I was thinking, “Those are empty. Can’t I stay there?” First of all, if it’s a business, your friend should not be allowing you to stay there for free because you’re going to make a mess of it. Two, if you stay there for more than two weeks in that vacation home or that rental part of your home, you then be excluded from being able to do a 1031 Exchange. I want to give that example because it’s popular. If you have a beautiful home, take one bedroom and then you scram your five or six kids in that one-bedroom and then all left, you rent out as a business.

To dive into that, that would be house hacking.

That’s popular because you can’t afford to pay the entire mortgage. You’re a single guy or a couple and you have one income or two incomes and you can’t pay off the mortgage. What you’re doing is you’re renting out the other rooms to roommates. That could qualify for 1031 Exchange of time on sale.

There’s a nuance there that goes beyond this show. If you’re doing that, you get your professionals involved. You’ve got to look at the square footage of what’s rented and what’s not rented. What Alex is referring to is a Rev Proc 2005-14. It’s what we call a Split Treatment Transaction. That’s what you want to look at.

It was so amazing to have you both on the show. There is so much good information. It’s another heavy technical session, but good and necessary. Thank you both for coming on. I appreciate it. If my audience would like to learn more about you, how can they find out more about you?

A great way to reach out to us, Alex Shandrovsky and Michael Brady on LinkedIn. We’re very active there. That’s how Lisa and I connected. Another great avenue is We have a great blog called 1031 Zone. You get a sense of the current issues that come up around 1031 Exchanges. Please reach out to us on LinkedIn. We’re there to help and it will be an honor and privilege to be able to help out The Level Up community and help level them up.

We do appear at various Meetups and do seminars around the country. We’re more than happy if you want to reach out to us for that purpose. We’d love to do that stuff.

I appreciate it. Thank you for coming on.


Thank you, Lisa.

Thank you so much, Michael and Alex, for coming on the show. I appreciate it. This show was undoubtedly a little different from my shows that I’m doing in this series. This show is similar to that Cost Segregation Study Show in the sense that this is about 1031 Exchanges. I wanted to weave in some shows on the technical aspects of real estate. In this case, the 1031 Exchange. I got a lot of value from this show. I learned a lot of good information about 1031 Exchanges. Some of my key takeaways were about the qualified intermediaries. Michael went into how to identify one that is a good one, such as knowing what they are doing. You wanted to take the time to research the companies and get to know them, talk to the people. Also, get to know the people to determine whether they truly know what they’re saying. Ask questions about where the money goes in between. They talked about the fact that they’ll set up an escrow bank account for your money. That way, the money goes into that escrow account and is held for you as opposed to not taking your money and investing it into stocks and bonds in the market while you go through the 1031 Exchange procedure of finding your properties, closing it, etc.

The other key thing was the timeline surrounding the 1031 Exchange that Alex went into. The qualified intermediary is selected before the time of the sale. It’s important. Preparation is the key here in terms of being proactive and setting up stuff in advance. Forty-five days from the time of closing to identify the new property and you can choose up to three properties of the same value or higher. Keeping in mind that boot is any money that is not reinvested is subject to taxation. One hundred and eighty days from the time of sale to purchase the next property.

We went into ways in which you could fail a 1031 Exchange. Everything from doing last-minute requests to not having sufficient time to find the next properties and identify them. A loan is not going through, it’s not closing within the time period. There are also limits. You can’t do 1031 Exchanges on fix and flips. This is a long-term strategy. You need to be buying and holding the property. Once you sell it in the 3, 4 or 5-period mark even though they didn’t give me a set time, but flipping is not a part of the strategy for the 1031, not in the same year. We spoke about being able to roll your 1031s. The fact that you will want to talk to your accountants and the people helping you with your tax planning to make sure that your estate is set up correctly, to be able to pass on those assets that you’ve been 1031-ing to the next generation. Building that wealth and legacy.

We spoke about the structures, the LLCs, the Tenant in Common structures, the TIC. Even though the TIC is the simplest in terms of being able to execute a 1031 Exchange both coming out of it as well as going into one is how the TIC will work most ideal. If you are in LLC, not all is lost, but you definitely will need to have conversations to the extent with your qualified intermediary. In the case of your partners that you’re in with be in syndication or a joint venture or whatever the case is. You go on to have those conversations early to talk about what the plan is for the future so that you are all on the same page and are able to price out whatever you need to price out to see what makes sense for the goals of the group that you’re in that LLC together with other individuals. There are lots of good information. If you want to learn more about 1031 Exchanges and would like to speak to these guys, their information will be on my website, I specialize in helping you to level up your investing game, bringing you content and actionable things that can help you to build that portfolio. Be it as a single-family home or multiple properties, whatever the case is, helping you to level up. Until next time, keep leveling up.

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About Michael Brady

LUR Michael | 1031 ExchangesExecutive Vice President at Madison 1031 Exchange.

With over 25 years of experience as an attorney involved in real estate and business transactions, I serve as Executive Vice President to Madison 1031 Exchange. As a Certified Exchange Specialist®, my primary focus is assisting investors in deferring taxes through 1031 exchanges. I also assist property buyers and their attorneys in obtaining title insurance and clearing title issues in over 20 states.

About Alex Shandrovsky

LUR Michael | 1031 ExchangesAlex is a Business Director for Madison 1031. He provides clients with expert, lawyer and CPA approved 1031 Exchanges. 1031 Exchange is an IRS -approved process for reinvesting the sale of appreciated investment property and deferring capital gains taxes.


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