When The 1031 Exchange Doesn’t Work: An Alternative Way To Keep More Of What You Earn In Real Estate With Lori Greymont

by | Dec 15, 2020 | The Level Up REI Podcast

LUR Lori | 1031 Exchange Alternative

 

The tax advantage that the 1031 exchange offers is a big part of what keeps a lot of real estate investors committed to space. But what if you’re selling and it doesn’t work for you to do 1031? In this episode, real estate investor and developer, Lori Greymont join Lisa Hylton to introduce an alternative way to keep more of what you earn in real estate. With 20 years of experience to her name, Lori is the CEO of SJREI, the largest real estate investment association in the San Francisco Bay Area. Listen in to this extremely valuable discussion and see if you can take away something you can apply to your own deals

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When The 1031 Exchange Doesn’t Work: An Alternative Way To Keep More Of What You Earn In Real Estate With Lori Greymont

I have yet another amazing guest on the show. Her name is Lori Greymont. Lori, welcome to the show.

Thanks, Lisa.

Can you go ahead and introduce yourself to my readers?

I am a developer investor in real estate. I’ve been doing that for many years. I run the SJREI, which is one of the larger REIs in all of Western the United States. A lot of people want to be part of this group because we are the ones that get the deals done. One of the things that I have always been interested in is how to keep more of what I earn rather than paying Uncle Sam everything. We’re going to talk a little bit about that.

I have invited Lori to come on the show to talk about an alternative to the 1031 exchange. For those of you who’ve been reading my show, I have done an episode with the 1031 exchange people but here is another alternative to 1031 exchange to the extent that, “You’re selling and it doesn’t work for you to do a 1031 exchange.” That’s what we’re going to get into and I’m excited about that. Before we get started in that though, Lori, you have been a developer, you’ve been in real estate for many years, and then you are also the president of the SJREI. Could you talk a little bit about how you got started investing in real estate? 

It goes back to my mom. When I was young, we moved into a house that was broken and we fixed it up. She liked doing that so much that she went on to another house. We moved into it and we fixed it up. Eventually, we got to the point where we didn’t have to live in the houses to fix them up, but it was a grassroots effort. We learned the trades from the inside out. When I started having my own children, I thought, “What can I do where I can have the flexibility of raising my kids at home?” Not putting them in daycare and still do something I love, which is work, create added value and I kept going.

What are some of the projects that you focus on these days? 

With COVID-19, we pulled back from the fix and flip model. In this industry, you have to be willing to go with the ebb and flow. There are about four cycles of where real estate is at as far as prices. You can always make a deal, no matter what the market, you just have to know where the market is going. This one is a little different because we don’t know if we’re going to go up, or if we’re going to go down, or we’re going to go sideways. We’re sitting on the sideline. We still have the investments that we started working on expecting a recession, and those investments are development or entitlement deals where we do not have a large amount of carrying costs. Our debt is low and it’s mostly paperwork going through the city, so our risk is low. You want to look at risk and liquidity. Those are the two pieces that we have in play.

What made you decide to play actively in the SJREI? 

My girlfriend had founded the SJREI. I lived in Morgan Hill and I didn’t necessarily want to come up to San Jose all the time, and so I founded the South Valley REI. After a while, she came to me and said, “Would you like to buy my REI? I’m done.” I’m like, “Okay.” There we go, so I bought it for her.

Since you have taken it over and it has done phenomenally well, what were some of the things that you put in place to facilitate or stimulate that growth? 

Some of the changes that we made as we started focusing on deals and deal structures. Most of the people that attend are coming because they want to invest. They want to learn to invest. They don’t want to be sitting on the sidelines. We brought in opportunities where they could make those investments either locally or out-of-state and passively or actively. We did polls of the group to see what they were looking for and what their appetite was. We’ve provided them with commercial deals, single house steals, syndications, about everything that they want. By providing them deals, they keep coming back.

With COVID, have some of your offerings moved virtually for that REI? 

Yes. We are not meeting live and we don’t anticipate for the rest of the year. We have decided to offer our meetings for free to anybody who wants to join us online and that includes the offerings of our products. What we do is we have something that we call NETOP, Networking Opportunity that’s separate from our educational meeting. In our NETOP meetings, when we put it out, you come with your own beverage of choice and we have little breakout rooms where you can get to know the people, and then we have a presenter that shares the opportunity that you can invest in.

No wonder people are coming to that one. For sure as an investor like someone reading, you want to learn more about different opportunities and you want to get started in investing, you could tap into the free virtual meetings that the SJREI is offering at this point. A nice little gift for COVID. Before we jump into taxes, could we talk a little bit about COVID and how you have seen it impact the real estate that you play in and the focus? How has that caused you to maybe change the way or even reconsider the way in which you’re looking at investing going forward?

Before COVID appeared, we anticipated that we would be seeing a recession and I had already started indicating to people to start looking for liquidity and start looking for safety in your investments. As safety investments means don’t over-leverage. Make sure that you can service the debt if you lose your job or your tenants don’t pay and those are principles that we learned going through 2008 to 2011. When COVID hit, the major impact that I saw was that we had to stop our rehabs for a short period of time because we were actively rehabbing. Having finished one and put it out on the market, there’s no inventory, it sold quickly for full-price and we were happy about that.

LUR Lori | 1031 Exchange Alternative

1031 Exchange Alternative: The tax code states that if you sell a house or an asset but you don’t receive all of your sales proceeds upfront, you only have to pay taxes on the portion you get.

 

As far as viewing the next deals that we want to go into, we put all of our new purchases on hold because we don’t know what the market is going to do. Based on what we’re seeing, we do anticipate a correction in the market, nothing like 2008, but we do think it is going to soften maybe by April or May 2021. That would be a good time to get your money liquid. If you’re selling now, rather than having to go into 1031, take that liquidity, put it on the sideline, and wait for the buying opportunity.

That’s a great segue into the alternatives to the 1031 exchange. Can you talk a little bit about what are the alternatives to the 1031 exchange? 

There are quite a few different alternatives out there. The one that I found is based on tax code M453, and it’s an installment sale tax code. A lot of people have heard of this through the DST, the Delaware Statutory Trust or the Deferred Sales Trust. That’s not what we’re doing here. This is a little bit different than that. It uses the principle of the tax code that says, if you sell a house or an asset, it can be a business or any asset, but you don’t receive all of your sales proceeds upfront, meaning you’re only going to get a portion of them, you only have to pay taxes on the portion you get. If we take that and we think, “How can we construct a sale so that we don’t receive our sales proceeds and we don’t have to pay our taxes?”

We construct an installment sale that is interest-only for 30 years. At the end of 30 years, you receive your sales proceeds. Now it’s taxable, but during the interim, the only thing that is taxable is the interest income that you earn on it. A lot of people might go, “I don’t want monthly payments.” We have a private lender that will make a business loan and give you a lump sum that you get to walk away with in exchange for those payments. They’ll take the payments, you get the money, and you have tax-free cash at closing because loans aren’t taxable either. We have set up a system where we put two parties together. One, diverse the taxes, and one gets you tax-free cash. You get to move forward with your money.

Could we dive into an example, say for someone who’s selling their own property. Maybe someone that owns a duplex or a fourplex and they’re selling it. We’ll get into later the dollar amounts that make sense for this, but say if we simple $100,000 or maybe $1 million or something, whatever is easier.

You can always make a deal, no matter what the market. You just have to know where the market is going. Share on X

Let’s start with easy numbers. Let’s say that you live in California and you’re selling an investment property and the gain on that property is about $1 million. Most people don’t realize is how much you’re going to be paying in taxes on that $1 million. We’ve all thought, “Capital gains is 15% or 20%. That’s all I’m going to pay.” The reality is most of the people who sell and have a $1 million gain, we’ll pay anywhere from $300,000 to $450,000 of their gain in taxes. That’s 30% to 45% in taxes that it’s gone. Once it’s gone, it’s gone. This is why people exchange assets because they don’t want to lose that much of their gain. One of the things I tell people is that we can defer that tax bill. If you have $300,000 and we defer the taxes for 30 years and you invested that at 8% compounded interest, that $300,000 will grow to over $3 million in those 30 years. If you had that $3 million, can you pay the $300,000 tax bill easily?

You can.

This is what we do with our sellers, we do charge a fee, it’s about 6.5%. Out of the $1 million gain, you’ll get $937,000. The $937,000 is way more than the $600,000 you would net if you had to pay the taxes. You can use that money. The thing that people forget about is inflation. What’s the dollar going to be worth in 30 years? You’re paying back your tax bill with 30-year inflated dollars.

A couple of things regarding the gain, the way I understood was that when you say you sold the property for $1 million, but your cost basis in that property was maybe $500,000 because it’s California and everything appreciates when you hold for so long. How much would you have had to buy that property? Your gain is $1 million. In order for your gain to be $1 million, then your cost basis would have to have been significantly less than $500,000.

In that scenario, yes. I had a client that bought a property in 2001. They paid $450,000. They sold it in 2019 for $1.8 million. That means that they had a gain of $1.35 million. They would have to pay taxes on that. They had depreciation for eighteen years. They have to recapture 25% of their depreciation and pay taxes on that. That was another $100,000 that they were having to recapture and then pay taxes on. We have a net income tax, which is 3.8%. By the time they were done paying state tax, capital gains, recapture, and the net income tax, they had 42% of that $1.3 million goings away in taxes. In the government, they didn’t even help take out the trash or repair the roof. If you want to cut expenses, the biggest expense almost always is your taxes.

What are some of the pros and cons of choosing to do this program versus a 1031 exchange?

The key is the transaction becomes taxable when you have something called constructive receipt. When you receive your sales proceeds, it’s called constructive receipt. Both of these programs differ in a constructive receipt. When you do 1031, you don’t get your cash, your cash is going in another investment. When you do this program, you’re not getting your cash, you’re getting a tax-free loan. You’re deferring on both of the scenarios. The difference is, this one, you walk away with cash that you can use for perpetuity. You never have to pay it back because your other money is going to be used to pay it back. It’s a way to get liquid without having to wait. If you’re in 1031 and you want cash, it’s called boot. If you have a boot, you have to pay taxes on it. When you access that cash, now you’re paying taxes. That’s the biggest difference. Another difference is depreciation.

In 1031, whatever you bought that first property for, and then you roll it over, that becomes your rollover basis. You don’t get the full value of the new asset because you’ve already depreciated some of the prior assets. That can make a difference. In this client’s case, that made a difference of a million dollars of depreciation, they were going into a $3 million property from the $1.8 million into a $3 million property. They cashed out and bought the property for $3 million. They got full depreciation again, instead of partial depreciation, because they had the original asset for eighteen years. After $27.5 million, the first asset goes away and they only can depreciate a portion of the second asset. It’s a huge thing. If you’re trying to shelter income, one of the best ways to shelter income is depreciation. It is not a real expense. It’s something that you get to shelter your income. You want your depreciation expense as high as possible. The best way to make it high as possible is to buy the asset cash.

This route enables you to get that cash to buy it. You go through an intermediary underneath this program as well, they take that money, and then they ultimately lend it back to you.

You’ve got to think about it as two separate transactions. The first transaction that we do with you is we defer your taxes. The second transaction that we do with you as we make a non-recourse business loan that you get. That non-recourse unsecured business loan is what you’re going to use to buy your next asset. Eventually, the loan gets paid off because your sales proceeds are sitting with the intermediary who pays them off.

That’s not until 30 years later. During this whole time period, are you paying interest on that loan? 

That loan does have an interest expense, but if you remember on your installment, you’re getting an interest income. You take the interest income, you pay off the interest expense, and they match each other. There’s no net cost or expense. We have one step even better. We do it automatically. You don’t have to remember. It’s completely hassle-free for 30 years.

Someone reading is probably thinking, “How did I not know about this?” Could you talk about that?

It’s not uncommon especially when we talk to tax attorneys and CPAs, they’re like, “I’ve never heard of this before. It must not be true.” If you’re talking with somebody who thinks they’ve heard of everything, they should be gone. The reality is that multibillion-dollar companies have been doing these for many years. If you go out and research it on the internet, you would see that they have done it like OfficeMax, Timberland, and there are a lot of companies that have already done this. The IRS in 1980 said, “You can get a loan in relationship with an installment sale and still get the tax deferral.” It has been around and M453 in the tax code, the installment sale has been around longer than 1031s. The reason it’s coming available is that we have two parties. We have somebody that knows how to defer your taxes and to make the loan. We have two separate companies that know how to work together where we can give you a plug and play system that now we can do without having a stable of attorneys to orchestrate it for us.

What happens if the person dies before 30 years? 

Nothing. A lot of my clients are 60-plus and they’re wanting to cash out. They don’t want to take on more debt because when you do 1031, you have to have equal or more debt. They want cash because it makes them feel more comfortable. They’re like, “I want to do this, but I don’t want to burden my kids or my grandkids with this whole trying to remember what I’m supposed to do in 30 years.” It’s easy because we set it up with automatic escrows. Everything happens automatically. The only thing that has to happen is you need to pay the escrow fee every year. You set that up with the trustee of your estate. If you pass away, this asset is in your estate like every other asset. The liability is in your state. It sits there. Every year the payments and the tax return happens. If you want to, you can buy an investment that will grow and that will pay the tax bill in 30 years. We talked about that $300,000, let’s say that was your tax bill, you invested that in an annuity and said, “Tax bills taken care of. Now I’m going to use the rest of the money.” You could still do that, but at least you and your heirs are getting the benefit of that money growing.

I’ve known people who have started down the path of a 1031 exchange and time ran out. They either identified properties and those weren’t the properties that worked for them at the end of the day, they ran out of time and wasn’t able to select something to invest in. Can they turn around and utilize this program? Would it be too late?

Yes, too late. This program cannot rescue a failed 1031. A fail in 1031 is failed. You lost all of your tax exemptions because if that money comes to you, you have a constructive receipt. There’s no way to undo constructive receipt. Let’s say that before you close, you want the option like you’re still researching this program and you are either going to do a 1031 or this program. We have a 1031 accommodator that works with both. You can place your money with this group and have the choice. Within 45 days, you can identify a property. Within 180 days, you can choose to do this program or you can buy your property. It gives you options to move forward. That’s what we recommend for our clients but this cannot save 1031. The only option is to go into something like an opportunity zone where you can take whatever your gain was, invested in the opportunity zone fund, and still defer that until 2026.

What are some of the parties involved in this program? We touched on the lender and the intermediary. Did I cover everything? Are there some other parties that we need to think about? 

What we do is we work with the title company. Before you gave your cash, we asked that you set up an account with our 1031 person. The main reason is that if your money goes to another 1031 intermediary, and we don’t have a relationship with them, we won’t be able to help you and they won’t release your money. It’s critical that if you think you want to do this, that you start working with our intermediary right away before the money gets there, and then you still have the same options, 1031, or working with our program. They work with our capital asset dealer. That’s the one who receives your sales proceeds so that you don’t. We have our private lender that gives you the loan amount, almost equal to your sales proceeds. You don’t have a tax bill and you have the cash to move forward.

Branching off from that, some of my readers are people who passively invest in syndication opportunities that a wide variety of different types of assets. Could they use this program if they are given word by the general partner that goes, “We’re going to sell the asset?” The general partner has decided that they are not doing a 1031 exchange. 

The key would be for us to start working with the general partner to make sure that all the funds first go to our 1031 accommodator because we don’t have a constructive receipt. Those that don’t want to do this program and don’t want to do 1031 can take constructive receipt of their funds. Those who want some deferral program have not received their funds. This is one of the things that we work with is a lot of syndicators. Maybe you have readers that are syndicators and somebody is coming to them with $500,000 coming out of 1031. If they can get them into this program, then they can bring the cash into this program and it makes it easier for you as a syndicator because you don’t have to have special paperwork to bring them in.

You don’t need to create these take entities and all that other stuff. To be honest, I discovered you through Facebook, you were having an interview with Adam Adams. I was like, “What is this? I’ve never heard of this before.” Amanda Han wrote for BiggerPockets. She goes that, “In the US there are two types of tax codes. There’s one for the people who know, there’s one for the people who don’t know, and both are illegal.” This episode is on point, if you don’t know, you just don’t know. Hopefully, with this episode, there are people who have learned something and can reach out to yourself to learn more about how they could potentially execute this and not pay tons of money in taxes.

The benefit of this isn’t just real estate. It’s also for businesses because if you’re selling a business, you don’t get the benefit of 1031 anymore. This is one way you can defer the taxes if you’re a doctor’s office, that office that thing, it’s huge for that.

Connected to that on 1031, you have to do the light kind. If you’re coming out of syndication, you’d have to go into another syndication. With this program, because you’re getting cash, you have the flexibility to move into something completely different whatever you like.

LUR Lori | 1031 Exchange Alternative

1031 Exchange Alternative: Those that don’t want to do this program and don’t want to do 1031 can take constructive receipt of their funds.

 

We can even separate different assets. One of the clients called me, his dad had passed away, left the property for him and his two brothers in San Francisco. Each was going to get a sizable gain. Two of the three of them wanted to 1031. He did not, he wanted his cash, and he wanted to go in the stock market, which he understood. We moved all their funds to our 1031 accommodator, the two brothers went forward and did theirs. He took his cash out through our program and everybody was happy. The reason I mentioned that is maybe you have a scenario where you want part cash and you want a part of 1031. If we can do it with individuals, we can do it with you as one person too.

The last thing is, do you have a limit in terms of the dollar amount that you guys work with for this program?

We don’t have a top limit, but we do have a bottom limit. You need to have a transaction of $500,000 or more because that’s where all of a sudden, the taxes start to make sense for the fee that we charge. We charge a 6.5% fee. It’s not much to have access to your money for 30 years. It’s minimal. If you go back into another asset that gets depreciation within one year, you’ve made that up in the savings. What I like to do is I like to work with each person scenario individually and show them what our program would offer them versus paying the taxes, and then they can make the decision. If it’s going to work, I’ll put them in contact with our professionals. We have a whole team of legal professionals that we can refer them to and that they can do their own due diligence.

If someone who’s thinking, “Maybe I can do this on my own.” Can you talk about why that might not be a good idea?

I like the do it yourself first. This program has been developed, refined, audited, and has stood the time test. The gentleman that developed it is a brilliant attorney and I wouldn’t even try to do it unless you’ve got a group of attorneys that can help orchestrate it. You have to have two separate legitimate transactions. You can’t pretend. Your loan cannot be secured by the payments on that installment. That’s the key. You need to have an unsecured loan and you need to have the installment sale. If you can orchestrate that where you can get an unsecured loan, you can have the installment sale and they’re completely separate transactions. That’s awesome and difficult.

One of the best ways to shelter income is depreciation because it’s not a real expense Share on X

Is there anything else that my readers should know about regarding this program?

Some people say, “Why would the IRS allow this?” This sounds too good to be true. In 1980, they said, “Yes, you can receive the loan in connection with an installment sale.” It still gets the tax deferral. In 2012, there was a memorandum that came out in regards to this. The reason is that it creates more money and commerce that can then be taxed. The IRS is in support of doing this type of method. It’s not something that’s new. It’s not something that we know about because it takes two parties.

If my readers would like to learn more about you, where could they go?

You can learn a little bit more on our deferred tax get cash website at www.DeferTaxGetCash.com. If you want to book a consult with me, if you’ve got an act of property that you’re looking at selling, it’s listed but you haven’t received the money yet, go ahead out to my website, it’s www.CallWithLori.com. You can book a time on my calendar.

Thank you, Lori, for coming on the show. I appreciate it.

Thank you for the opportunity, Lisa.

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What an amazing episode. I had no idea when I heard this and saw the video on Facebook for the first time, I was like, “What? Is this real? Is this even possible?” If you’re reading and you’re like, “I had no idea that this was possible.” Real estate investors as well as people who own businesses, this is a program that can help you to defer taxes and be able to take that money and continue investing it, creating more businesses, buying more real estate, or whatever the case. It’s an awesome program. You get started. If you reach out to Lori, she gave her information at the end of the show. Tell her that you read it on the blog. Until next time. Keep leveling up. Take care.

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About Lori Greymont

LUR Lori | 1031 Exchange AlternativeCEO and President of SJREI, the Bay Area’s leading, nationally recognized real estate investors association — Lori Greymont is a serial entrepreneur and developer based in the heart of Silicon Valley.

She has served as the president and CEO of several real estate development and similarly related companies.

In 2014, she purchased the largest San Francisco Bay Area real estate investment association (SJREI) and was able to double membership in less than 9 months. In addition, she doubled the revenues of this company by implementing programs to create monthly recurring revenue.

Lori’s real estate experience includes remotely rehabbing and flipping over 1600 sfr’s nationwide to hedge funds from 2011-2014, ground-up development of multifamily communities, zoning changes of infill lots to PUD’s and commercial, syndications and funds.

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