Intro The following is a paid program that does not necessarily reflect the opinions of the staff or management of visionary-related entertainment.
Clint Hansen This is Clint Hansen with Maui Real Estate Radio- The Hansen Ohana. You can find us at mauirealestateradio.com or on our website at mauirealestate.net. We're broadcasting today: Monday, 7:00 AM and 11:10 AM, the KAOI Radio Group. Also on 98.7 FM 96.7 FM. Thank you for joining us today. We want to talk a little bit about the escrow process. Of course, we're going to have a more involved one but there is a fantastic tool that a lot of people don't realize that is offered. That's called the 1031 tax deferred exchange and is available for investment properties. You can kick the can down the road. Pay those taxes on a later date. Before we get into that, I wanted to talk a little bit about a new listing I have. I am co-listing with Olivia Smiler, a beautiful, new, one bedroom, one bath condo with a great little view of the Walaka Feel free to give us a call at 808-280-2764. That's going to be listed at $499,000. If you can give me a call, that's-- or find us on our website at mauirealestate.net. So today, we have Julie Tumbaga in the office. Do you want to talk a little bit about yourself and how long you've been playing this game for with helping people 1031s?
Julie Tumbaga Okay. Thank you. Hi, everybody. I'm Julie Tumbaga. But I recently got married. So my new last name is Bratton.
Clint All right. Congratulations.
Julie So if anybody gets confused, I'm the same person.
Clint It'll take me a while.
Julie Yeah. That's okay. All roads like Nemo lead to me for some reason. Okay. 1031 exchange is a way to defer paying capital gains tax. I work for a company called Old Republic Exchange. I've been doing exchanges. It's my 18th year doing them so it's--.
Clint Wow.
Julie I love this job. Everyone has a story but the rules are still the same.
Clint That's just about the same time I've been selling real estate. I've been doing it 17 years now.
Julie Wow. You started when you were 12, also?
Clint I know 12.
Julie Oh, my gosh.
Clint Thank goodness we look so young.
Julie Yes. There you go. So it's a way to defer paying capital gains tax and it is just for investment property. So people sell investment property and buy investment property within a specific period of time. They can't sell an investment property by a personal residence. You can't sell a personal residence via an investment property and defer paying capital gains tax. So if you wanted to defer paying the tax, it's got to be investment property for investment property.
Clint Yeah. And this isn't cheating the system or anything like that. It's a tool available to allow you to pay your tax on that, you know, capital gain. When it comes time to trade out of it, you're going to be using that capital for an actual personal purpose. So you know make that mine. This isn't some sort of cheat. It's an actual tool that's been along for a while and there's actually a variety of ways you can do it. You know some people don't realize that, you know, they can add additional cash but they can't pull any out, right? That would make them subject to you know those taxes on that portion?
Julie Right. So when you do an exchange and you sell your investment property, you're not allowed to touch any of the proceeds. All of the proceeds that you net from your sale have to go into the new replacement property that you purchased.
Clint Equal or greater value, right?
Julie Right. So this is a deferral of tax, not a get away from paying tax forever.
Clint Exactly.
Julie So like Clint said, you can keep exchanging exchanging exchanging but once you sell the last property that's when you would pay the tax or sorry to say to get out of it, you pass on and your kids would inherit it at a step up in basis. And what that means is--.
Clint Step up or step down?
Julie Step up.
Clint Okay.
Julie So what that means is if you pass on - let's say you did an exchange and you started at 200,000 and you moved up, you moved up, you moved up, and now your property is worth one point two and you pass on, your kids don't inherit your capital gain burden. They have to pay estate tax but who cares. They just got a property worth 1.2. Now if they held onto it for another couple of years - let's say and now it appreciated more - then they would pay taxes on their own gain.
Clint And only two things that are true in life, right? Death and taxes.
Julie I know.
Clint The Inevitables.
Julie That's the way it goes. But yes, so when you do an exchange and let's say you have an investment property that you're going to sell and you're going to sell it for 500,000, for an example, you need to purchase equal to or greater than $500,000 worth of property to have a 100% deferral. You can buy several properties to get to 500 if you want.
Clint All right. Nice.
Julie You don't have to just buy one but you have to buy equal to or greater than what you sell, the relinquished property for. Now, if you buy less, that's okay but the difference would be exposed to taxes and then you would do a partial exchange. You just don't want to buy too far down less.
Clint So if you're paying-- if you gave a $400,000 purchase after selling a $500,000, you would be exposed on that 100,000 to taxes depending on a number of things.
Julie Well, yes, pretty much. So they can take the 500 and you can subtract commissions and escrow fees. Those are the only things you can deduct. So let's say you were paying 6% commission and escrow fees were about 1%. You could safely subtract 7% from the 500,000. I know I'm doing this math quick but that would be 465 so you'd have to buy something equal to or greater than 465 to have 100% deferral. If you only wanted to buy for 400 like you just described, that difference of 65,000 would be taxed.
Clint Yeah, absolutely.
Julie So it's okay to buy down. You just don't want to buy too far down where it doesn't make sense.
Clint Yeah, at that point, you might as well just pay all your taxes. You know how much gain you expecting unless you've been holding onto the property forever.
Julie Exactly. So when you do an exchange, you have to be selling and buying like-kind property. That's a very misunderstood term in this field. So like-kind. It can be condominium for condominium or single-family home for single-family home. That is like-kind. But it really is any type of real property. So you can sell a single-family home and buy a commercial building. You can sell a commercial building and buy five condos if you want. As long as it's real property, you can do an exchange with it.
Clint No gold?
Julie No gold. No boats.
Clint No boats.
Julie You can't go buy a boat. A boat is personal property. So like-kind is very misunderstood. A lot of people read that and they think it has to only be single-family for single-family home or whatever.
Clint And so for that process going through a 1031 exchange. Let's just say we have a number of properties because you know it's not like you're going to be selling somewhere else. It doesn't even have to be just Hawaii either. This doesn't have to be the same state. It's a-- you're avoiding not avoiding but you're kicking down the can.
Julie Deferring.
Clint Deferring. Yes. Kicking down the game yet. One or one of those.
Julie Either. Same thing.
Clint So for the layman. And if you wanted to 1031 say from a property in California, Washington, Arizona, something like that and come into Hawaii, that's something you can do right across the [crosstalk].
Julie Absolutely. You can do an exchange anywhere in the United States and the U.S. Virgin Islands and Guam.
Clint All right.
Julie Just not Puerto Rico. I don't know why they left that out but they did. So yeah, so people, you know, sell their investment property in New York and they buy an investment property in Hawaii and vice versa. And I mean as long as it's investment property for investment, you're good.
Clint And sometimes, you're going to be selling multiple properties in order to buy something here in Maui.
Julie Yes, you can do that too. I mean that's one of the great things besides deferring paying capital gains tax and a 1031 exchange. You can diversify and leverage your portfolio. So you can sell five properties to buy one.
Clint That's tough to do though.
Julie You can sell one and buy five. Yeah, it's all about the timing which I'm sure we'll get to shortly but yes that's how you do it.
Clint So speaking of timing say, I sell a property. How does that clock start ticking and what do I got?
Julie Okay. So to set up an exchange and exchange needs to be set up before the escrow closes. So you can't close the escrow and then call me the next day and say, "I want to do an exchange." Because you're not allowed to touch the money. So when the escrow closes, they would have to send the exchange company the money.
Clint So make sure you're called first. Get that account set up so that you're ready. And yeah.
Julie And it's very quick and painless but it just needs to be set up before closing. Even if it's a day before closing although a little notice would be nice.
Clint Well, are you saying people don't give you enough notice sometime?
Julie Ah, well, you know. I am pretty quick but still it needs to be set up ahead of time.
Clint More notice, the better.
Julie But the day the property closes is when the clock starts to tick and I think this is the most stressful part for an exchanger because from that date, they have 45 days to identify in writing what they're going to buy. And a 180 days to close on it.
Clint All right.
Julie So the 45 days is included in the 180. You don't get 45 and then a fresh 180 and every day counts. So 45 day lands on Easter Sunday. I need the list of what they think they're going to buy by Easter Sunday and if the 180th day lands on Christmas, they've got to close before that they have to close on or before the 180th day and these deadlines are the black and white of exchanges. I mean you really got to follow them.
Clint Yeah, and there's a lot of things, you know, sometimes they fail to realize what those timelines is this includes loan processing, you know, and there can be unforeseen things, you know, sometimes government shutdowns slow down the process.
Julie Oh, yeah when that happened it was, you know, people had to cut their 180th day amount of might have been on a Christmas and that was on a Monday and that was a holiday and then there was Sunday and Saturday and just--.
Clint Yikes.
Julie Then it was a-- they had to close on their 175th day just because of the government shutdown and the holidays and the weekend in between. So got to pay attention to those especially when you're buying new projects. You want to make sure the developers on time.
Clint Oh, men.
Julie So if the developer needs an extension,--.
Clint You're in trouble.
Julie --you don't get one. Exactly.
Clint That's one of things. You mean you really want to think ahead when you're doing. This isn't something that you just do as an afterthought. You definitely have to be thinking forward. You want to make sure or say, for example, you're going through and you're going to be doing loan that you get your ducks in a row that you've paid your taxes so that you can qualify that year's income toward your purchase. You know make sure that there hasn't been any excessive write offs on your business or your personal income, you know, so that you can make sure that you get that qualification but that being said, let's say that you are going to be purchasing something and getting a loan on a property. You have to be purchasing a property of light kind. That also comes down to a ratio of loan, doesn't it? Like isn't it similar?
Julie Yes. Glad you brought that up. So again you have to buy a property that's equal to or greater than what you sell the relinquished property for. So if you're selling something for 500,000, escrow will pay off the commissions, escrow fees, and the mortgage. And again those net proceeds come to the exchange company: me. And I hold them until you're ready to buy the replacement property. So the money that I'm holding is used for the down payment for the new property and then the client or the exchanger gets brings in cash or gets a mortgage for the difference. It's not about 10% down, 25% down, 30% down. That has nothing to do with it. It's what you net from the sale of your relinquished property is the down payment. So that puzzle needs to fit. So I can't get a higher mortgage, you know, to do improvements afterwards or anything like that. That puzzle-- that financial puzzle needs to fit.
Clint And this is something that's specific to properties right. It's something that, you know, international buyers can qualify for as well. If you're from Canada, can you purchase a property in Hawaii after selling something in California or Vegas [crosstalk]?
Julie Absolutely. So yeah. So foreigners can do exchanges. They have to jump through a little bit of a hoop. So we have two things here. There's Hawaii withholding. So non-resident sellers selling property in Hawaii are subject to a HARPTA withholding. So the Hawaii state just wants to make sure they're covered. So escrow will collect seven and a quarter percent of the sales price and pay it to the state. If you do an exchange, you're exempt from that. And that happens pretty quickly. But with the foreign sellers and buyers, it's called FIRPTA--.
Clint 15.
Julie --15% of the sales price. So a foreigner can do an exchange and they're exempt from that but they're not exempt until the exemption comes in. And the problem with that it takes a long time. Takes 120 to 180 days to come in. So this is what how it works. So for foreign seller wants to sell property here in Hawaii and do an exchange, escrow has to collect 15% of the sales price. The problem with that is that the exemption doesn't come back in in time. So the client's going to be short funds to buy the replacement property.
Clint Unless?
Julie Unless they bring in fresh cash.
Clint Fresh cash.
Julie So if escrow collects the withholding out of the exchange proceeds, that doesn't really work for the foreign seller or exchanger because when he finally gets his money back, he's getting back exchange proceeds which you're not allowed to touch. So when he gets them back, he's touching them. So they're going to be taxed.
Clint Going to have to exchange do it as a loan or something.
Julie No, he's just-- he's going to pay taxes on it period.
Clint Also, doesn't matter.
Julie It doesn't matter. So the solution to this problem or this situation is for the foreign seller to bring in fresh cash closing to cover the withholding. And then when it all shakes out and the client gets exempt to the end of the day, he files for a refund and he gets his own money back.
Clint I see.
Julie His own money is not taxed but if they use exchange proceeds to deal with it.
Clint Okay. So there is a way through it.
Julie There is a way through it. It's just--. Yes.
Clint [cupkidded?], annoying, timely.
Julie It's a little bit-- it's a little bit timely and it's a little bit annoying. But, you know, they are-- they can do it. So that's the best part. I mean people love Canadians especially.
Clint Yeah, it's not something that they even realize exists here.
Julie They love Maui Yeah. So I do a lot with Canadians and the Japanese, for everybody.
Clint And that's one of our big buyers at least here in Maui is Canadians. I mean we have a lot coming in here. You know we have some Japanese but--.
Julie Canadians love it.
Clint --almost no Chinese. I know over where you guys are on Oahu It's a little bit more common. But we have very-- like one a year to a year.
Julie Yeah, we don't have as much. I have a lot of Koreans tourists.
Clint Korean.
Julie Yeah. So it's interesting. Yep. So one thing we didn't cover earlier that I did want to bring up and I get this question a lot especially for people who are just learning about exchanges. How long do you have to hold the investment property for investment before you can do an exchange? So just so you know, there is no rule or law on how long you have to hold investment for investment. I like to say at least a year. I'm almost pulling that out of the sky because there's no rule because at least you can show on one year tax returns your intent. How you're part of one year of income to the IRS? How they going to argue that. The longer you hold the property for investment, the better your story. And also, I have clients that say, "Okay, I'm selling my investment property, and my brother's been living there, and I'm going to sell it now, and do an exchange." And my first question usually to this person is: Is your brother paying you for your market value in rent? And usually the answer is no. So I don't think the IRS really cares who the renter is but if some of your family members or your friends are staying there for free and you happen to get audited, the IRS could very well come to the conclusion that you're holding it for personal use.
Clint You want to be reporting that number too.
Julie Not investment.
Clint You don't want to be pulling cash and putting it in your pocket is you got to be calling that income if you want to qualify for that 1031, right?
Julie Right. So people who buy properties fix them up and sell them. Are they holding it for investment? Are they holding it for resale? In their minds in it's investment property because when they're flipping it, they're making 50 grand or whatever they're making. But on paper, they're holding it for resale. So they've got to be careful about that.
Clint Very.
Julie So the process starts again when the relinquished property closes, that's when the clock starts ticking- the 45 days and a 180 days. So when they identify property, there's a couple of ways to identify: the first way, the most common way is the three property rule where you can identify up to three properties. You don't have to have an accepted offer when you identify but you have to purchase something on your list. You can make as many changes as you want to your list as you want the 45 days. But on the 45th day, I need the final list of what you think you're going to buy. And it needs to be complete addresses so you can't just identify project--.
Clint Unit number [crosstalk].
Julie --pick a unit later. Okay. It has to be a specific unit number and I always tell people, "Make sure the addresses are correct because I will not know if they are wrong." It has-- that's like the black and white of exchanges: the timeframes and identifying. So what my job is or part of my job is to make sure that's correct and that happens.
Clint Ah, separate back to the foreign investor. One thing that I was surprised to hear so let's just say it's the entity itself is Hawaiian, you know, a corporation or something that was made here. This is something you absolutely 100% need to talk to your tax accountant and your financial advisor. But from my understanding that HARPTA and FIRPTA, you can-- if you're trading within your company and purchasing, you can actually you know avoid that 22% if you're Canadian, right?
Julie If, well.
Clint Twenty two and half.
Julie Okay. So entity sells the same entity has to buy--.
Clint Purchase. Yup.
Julie --a replacement property. You can't necessarily buy from yourself because that's would be a related transaction.
Clint Precisely. Yeah.
Julie So that is something that I always have to look into a little bit deeper to see who's part of these entities.
Clint And make sure it's done right because that's something and in itself at least takes a week before they can approve it.
Julie Right. And what's interesting for us and you to Clint is you and I, we don't give tax advice.
Clint Exactly. That's why I'm saying it.
Julie And we rock a fine line on giving it to you. So you know every once in a while, we're going have to tell you guys, you need to go call your CPA or tax advisor and get some oversight on it because there's no way we would know what your personal situation is in its entirety. We can just guide you in the best direction possible. And your CPA should pretty much tell you if--.
Clint In the simplest things [crosstalk] that.
Julie --if these exchanges work. Yeah, the littlest things especially how you hold title.
Clint Precisely.
Julie So the second way to identify. Remember, the first one was the three property rule, up to three properties. So the second way to identify is called the 200% rule. So if you wanted to identify more than three so four or more. You can but the fair market value of the entire list combined cannot exceed double of what you sell your relinquished property for. So back to our example, if you sell for 500,000 and you wanted to identify four properties or more, you can but a fair market value of that whole list you give me cannot exceed one penny over a million. Okay. So you can't go hog wild and identify an entire neighborhood and then select one later which is probably what somebody did and that's why we have this silly rule. But the IRS does cap that. You again you only have to buy something equal to or greater than 500. But again, you can't go identify a whole project and then pick one later.
Clint All right. So this is again Clint Hansen with Maui Real Estate Radio, mauirealestateradio.com broadcasting at 11:10 AM 98.7 FM 96.7 FM, the KAOI Radio Group. We're here with Julie this morning. You want to tell us a little bit about how they can get in contact with you. Got a phone number that you would want to direct them to?
Julie Sure. My phone number-- I have a toll free and a direct. My direct is 808-524-6737 and the toll free number is 877-591-1031.
Clint All right.
Julie Catchy, catchy, ha.
Clint Hell, wow. I see what you did there.
Julie I got really lucky with that one [laughter].
Clint You didn't beg for that one it just happened?
Julie It just fell out of the sky.
Clint All right [laughter].
Julie Yes, I got it. It's good and catchy.
Clint So starting from square one, let's just run through an example of this. I have a $400,000 condo that I'm selling in Vegas or California or wherever. Let's say you're making that--.
Julie Let's say Vegas.
Clint Vegas. All right. Let's do it.
Julie Okay.
Clint And you have expenses and obviously, there's escrow and title and whatnot and your 1031-ing that into a property here on Maui So $400,000, you got that. All right. She's got pen and paper. We're doing this.
Julie Yeah, I'm writing down the scenario. So I don't last track.
Clint And then you want to buy a, you know, $600,000 condo here in Hawaii and you want to 1031 those funds into here. Go a little bit through that process.
Julie Okay. So if I was talking to you on the phone although I'm talking to you across the table right now. I'm going to ask you a couple of questions.
Clint Which is a rarity by the way [laughter]. She's on Oahu I'm on Maui
Julie Yes. That's okay.
Clint We're like best of friends. I'm talking to her all the time.
Julie I know.
Clint But it's good to see each other's face.
Julie Okay. Absolutely. So if you're selling for 400,000, I'm going to ask you a couple of questions. How much are you paying in commission to your agent? 6%.
Clint I like 17 but okay, we'll go with 6.
Julie Okay, six, six, six. And escrow fees are about 1% so you could safely subtract 7%. So your magic number to have a 100% deferral would be 372,000 because I was able to take the 400 and subtract commission and escrow fees only.
Clint So if you were going to buy a property at that value.
Julie You would have a 100% deferral.
Clint Fantastic. Okay.
Julie Okay. Now, do you have a mortgage on it?
Clint Yeah, let's just say we have an 80% mortgage on it or no, let's do 50%. That'll make it a little bit easier.
Julie Like what 150?
Clint Yeah.
Julie Okay. Let's say you have a $150,000 mortgage. Okay. I'm doing my math here. That means you would net about $222,000 approximately from your sale. So that 222,000 will be your down payment for your new property. And you'll come up with cash or get a mortgage for the difference.
Clint All right.
Julie So two two zero. $380,000 mortgage. Okay. So 220 would be your down and 380,000 would be the mortgage. Fantastic. Okay. Now, when you do an exchange and you're negotiating your contract on your sale of the $400,000 property. Let's say the buyer walks through and says, "I want a credit of $5,000 or $8,000 for this, that, or the other thing." I don't like to see credits on the closing statement because they're considered a non-exchange expense.
Clint You want to pay for the escrow process.
Julie So probably what you should do is either do it. Yes. So either do it outside of escrow or just the sales price down to accommodate the credit. But otherwise, you're selling for 400 and you're buying for 600,000. That's perfect.
Clint With counting to escrow fees, right?
Julie Yeah, title and escrow is fine. That's deductible and you can use it. Those are allowable expenses. But usually when I say, "You can deduct those things." People ask me about 15 other things they can deduct [laughter].
Clint Yeah. What about? What about?
Julie I have to say no sorry. Just customary closing costs and which are defined as commissions and escrow fees.
Clint Yeah. In addition to finding out unknowns, we don't want to have big numbers in there because we want the property to be clean and clear and not damaged. But you know also, we want to make sure when a 1031 exchange is happening, we're not exceeding the amount, you know, because we don't-- we want to make sure that it stays sheltered.
Julie Yeah, everybody has to talk to everybody in an exchange. So something that you would do Clint in your everyday business is to, you know, suggest a credit for the buyer [crosstalk] and seller to close the deal. Make everybody happy. Let's go to dinner, right? And then on the replacement property. Same thing. Let's get a credit. Let's just make this deal close and then you throw a lender in the mix and they're in the business of loaning money. Sometimes, they might say, "You know what, you qualify for a little bit more money." And I want you to do that exchange.
Clint No. No.
Julie You only should be getting a mortgage for what the difference is. But that's his profession and that's what he would do. So we all just have to talk to each other to make sure that something that we do in our everyday business doesn't affect the exchange.
Clint And it really does depend the lender you're working with because most of the ones that I recommend are very familiar with the 1031 process and you know honestly, it's a good funnel for business too. A lot of them specialize and understand that and they understand those tight timelines. So if you have something that's really difficult, it's important to give me a call and I can direct you to the proper, you know, mortgage broker or mortgage person. My number again is 808-280-2764. That's 808-280-2764. You can call, text, or whatever. That's my personal cellphone and you can always email me. Clint Hansen. That's my name. Clint Hansen. That's C-L-I-N-T H-A-N-S-E-N, 33 at gmail dot com or follow us on our website at mauirealestate.net. You can actually find the full transcript of this show at mauirealestateradio.com as well as the podcast. A lot of people like to listen to this on their own time other than just cruising along on a Monday morning heading to work. And I wanted to again, this 1031, it is a very very valuable too. So thank you so much for teaching us about this today.
Julie Oh, no problem.
Clint I want-- these are any other points of it, do you think is important for people to understand, you know, because it is a complex and but very important tool.
Julie I do. So one thing related parties. Everybody is related to everybody in Hawaii. So I just wonder if you are planning to sell to or buy from a related party when you're setting up the exchange, you have to let me know. So we can have a conversation. Because there are specific rules for that to follow. So it's not against the law to sell to or buy from a related party but it's not always a bulletproof transaction and you need to understand what those parameters are. Moving forward.
Clint All right.
Julie So you can reach me. I'll do my phone number and information again. I'm Julie Bratton now [crosstalk]. I know. I'm doing it. I'm getting there. My phone number direct 808-524-6737 and the toll free number 877-591-1031. And my email is J, for Julie, B like boy, R-A-T-T-O-N, like Nancy at Old Republic exchange dot com. And feel free to call or email me anytime your questions. I'm happy to answer them. And if I need a little more information, I'll always-- I might ask you a couple more questions before I answer your question in its entirety because sometimes, I need more info.
Clint It's very unique process.
Julie I'm happy to help. Please tap in as a resource anytime.
Clint Thank you. Thank you. Cindy Paulos is actually here with us today. And I was wondering, did you understand the process? Was there anything that you were unclear about? Cindy Paulos Well, this is to me a very educational, very interesting and I have to say you're very good at it Julia. I'm very very impressed--.
Julie Oh, thank you. Cindy --with your ability to understand and express it and communicate it.
Clint 18 year of experience. Cindy Truthfully, you know I've done-- gone through this process before and I am very very bad at math and in fact, your mother and father sold me a couple of pieces of property, Clint and I loved them and they were smart enough to realize I was way in over my head.
Clint Grinch.
Julie Oh, that's so great. Cindy So I just basically said, "Can you help me please to make this possible?" And that's one of the things I love about the Hansen's is when you are kind of getting in and you don't understand. To trust the people you work with, to hold your hand to make it possible is almost so crucial because it is-- otherwise, it could take a miracle to make it happen. If you're one of those people numbers come easily to, it's great. But I'm on the creative side and I can't think like that. And I'm very bad at record keeping and I'm dyslexic on top of it. So on top of that, I just have to say, "Having a real estate person like Clint or your parents can make a huge difference if it is overwhelming. And obviously, you, Julie have a very good understanding of it. So when you get to someone at this level of professionalism that you can trust, it makes things that would be impossible and overwhelming possible. I mean there's so many details that you just expressed. I never ever would have thought of. I'm truly completely out of my realm of understanding.
Clint And it's just one simple small tool. We're going to be going into more of the nitty-gritty associated with the escrow process, different tools to help people understand and a whole variety of situations whether that's a local buyer, whether that is a foreign buyer and, you know, sellers as well, of course, that's the main component. People are coming to us to help list their properties. But you know buyers do come to us and I do explain that. But most people, most of the buyers that are coming to me are educated and understand what a 1031 exchange is. It's kind of funny. You know we deal with a lot of Canadian buyers. I mean it's a huge number. In fact, my wife is Canadian. My sister-in-law is Canadian. They're both on either side of the coast. My sister, she's from Quebec and my wife, she's from Vancouver. So the Richmond area down there.
Julie Oh, wow.
Clint So we are straddling both sides and we have lots of friends and family. We go out to Canada every year and they definitely make up the bread and butter. But I've absolutely helped people from Japan. I have helped people from Australia. I've helped people from Switzerland, Germany. I just helped a person close a property in France that was not subject to a 1031 exchange because they were keeping those funds and decided to pay the taxes on it plus the exchange was so great. They were, you know, happy with paying the tax on it. Cindy But there's got to be-- the also the changing rates that are going on too from when you first starting to look--.
Clint Oh, most definitely. Yeah. Cindy --versus when you sell, there can actually be a change in the dollar value versus France or what happens in England. There's been a lot of changes in the value of the pound and but--.
Clint When I had a lot of Canadian purchasers coming to me with the subprime crisis and about 2009, 2008. You know things were getting pretty hairy and the American dollar was dropping for a variety of reasons and the Canadian was going up because of the resource rich and the new technology behind oil sands and fracking. So their dollar was doing quite good. Typically, there are about, you know, 87 cents to, you know, under 90 cents and at that time, they were at one dollar. I think it almost reach one dollar and fourteen cents per our American dollar. So it's almost like a 25% change alone. So you know in addition to buying in a down market, you know, 2009, 2010, 11, they were making huge trade disparities. You know when it comes time to sell off. If one of those people who bought in 2009, you know, if they were to sell a property now not only are they going to make the capital gains on that, they're also going to be making a huge amount of money if they decide to bring that money back to Canada. But, of course, at that time, you're going to be subject to a whole another layer of taxes both in their own country as well as here. So it's important that we direct you to the right authority and we have a large number of people we can direct you to and give you phone numbers and email addresses so that every T is crossed and every I is dotted. Cindy And on top of that, there was a change in the rules. When I bought that grand champions property, at that time, I could swear it was like you had to keep it for two years or over two years.
Clint Yeah. Safe Harbor. It depends. You know and again, it really is unique to your situation. If you have something that's an emergency situation or what's the word I'm looking for a-- like a divorce. If you have a death in the family, loss of income, you lose your job. You know they can be a little bit more lenient with the need to make those kind of financial moves.
Julie So it's just about your intent.
Clint Intent. Yeah.
Julie So there's a lot of people that say to-- like you can talk to 10 people and get 10 different answers.
Clint Precisely. Precisely. Cindy But it wasn't a said two years.
Julie Not two years. It's not. Cindy I always thought it was.
Julie So maybe your intent was let's say you bought a property, you know, in January and your intent obviously is to hold it for investment. Maybe you have a renter in there and then some guy walks down the street with a bag of cash and makes you an offer you couldn't refuse. Your intent was to hold for investment but okay, here you are in this situation you're going to sell it to this guy [crosstalk] and you are going to do another exchange into something else. And if you got audited, I think that's very arguable. But you know if six months down the line or today you put it on the market and you listed it. You know the IRS might say that's kind of funky.
Clint Or the hardship [crosstalk]. Cindy And there's been more of these flipping of houses that have happened, of course. I mean there's been I think an increase. Maybe it's because of the TV shows, the things that people are seeing flip that house. But this seems like there's more people now trying to do that.
Clint It's a hard thing to do.
Julie [crosstalk] We'll, they're going to pay a little more taxes.
Clint Yeah, absolutely. And they do. I mean there's taxes, of course. Cindy Has the tax rules changed or a lot of tax changes last year?
Clint Oh, Lord. Yes. They do. They change a lot.
Julie A lot of them change not much in the 1031 field except you can't do a personal property exchanges anymore. But I feel like this last year and this year everybody, everybody should get some kind of foundation or base layer by talking to some kind of tax professional to do your taxes. So you can just make sure you were taking care of all of those new changes in your own personal. Cindy The one that shocked me was-- because I've moved about 10 times since I've been here at least 10. But moving expenses are expensive. You know very costly if you're coming from [crosstalk] France. I can't even imagine what it would cost or even Canada. I mean it's expensive here though if you're talking about that example of Las Vegas something going from here to from Las Vegas to here would cost at probably a minimum of 5,000 moving expenses if you're taking your furniture with you in and stuff. And now, they don't-- and I'm maybe wrong but I heard the taxes do not include used to be able to write off your moving expenses and now, you can't.
Clint You know some people have very unique ways. They sell their property to an intermediary. This is something that you're typically going to see more with professionals in the hotel industry, upper management, CEOs of major companies. What they'll do is they'll work with a third party to help that but you know what, the adding that additional third person, it's usually financially makes more sense to take those and just straight sell them, you know, and not count them as part of the sale whatsoever. You know a separate bill of sale or, you know, just taking them to a third party that will auction those off or sell them in their shop as opposed to trying to ship it or deal with one of these third party moving companies because they add additional costs to the transaction to help with their moving process. You know I had clients that were selling that. I helped them purchase a property in Na Hoku in the Maui Lani area and they were initially going to be going through their company in order to do this because they had these great incentives but then when they saw the actual costs associated with it, they made the decision just to go straight through me as opposed to working, you know, their referral program because that added-- they had a lot of little hidden expenses in there and you know the tax benefit is unless it's gonna be a massive property doesn't usually make that much sense. Not to mention, there's some kind of strange little disclosure things that it's all of a sudden the property is owned by the hotel or the exchange company and then, you know, it's like how does disclosure work with that. Because they don't know anything about the property. They're just holding the asset. So it's very clouded and murky, you know, when people start learning about the little idiosyncrasies with it they often opt to go through a more normal process. Cindy So there I even bring up the word timeshare [laughter]. There--.
Julie Sure.
Clint I don't. Cindy -- [crosstalk] murky.
Julie Timeshares qualify for an exchange if you have a deeded interest.
Clint Deeded interest. Cindy Can you explain that how that work?
Julie Well, you get a deed. So there are timeshares out there that you don't get a deed. So you have to have a deed. By anyway, what's your question? Cindy Well that would be it. I mean because, of course, I've never done a timeshare but there's so many variations on a theme and it's become a dirty word pretty much. I hate to say it [crosstalk]. It really does you know.
Clint And the reason is I mean timeshares can be a wonderful opportunity for people to buy a property here in Maui at low cost. But the overall expenses by comparison are considerably higher. You're taxed at almost 50%. Cindy Oh, really.
Clint Yeah. Because as opposed to under 1%, it's almost like one and a half percent that your taxes. But of course, your money down on the purchase is going to be considerably less because it's factionalized. But you know, considering you're purchasing, let's just say, you know, one twentieth. If you were to multiply your purchase price by 20, it's really, you know, you're spending a lot more than one twentieth of the value of that particular property. In addition, they tack on little fees and there. Cindy That little.
Clint Yeah. Cindy I think that is a big fees. Yeah.
Julie That's the fees. Cindy That's the fees.
Clint So a lot of time it just, you know, it's great because there's wonderful programs in there that allows you to trade and swap and it's fun to play with your vacation time and force you to take it because people need time off. So that's a really big plus. But I think that for financial decision, it's not like real property. It's not really an investment for the future. Most people I know call me up and they're like, "Hey, I've had this thing and I'm not really using it. I got these expenses, renting it out enough and you know for that two weeks that I have it and use, resell it and I'm like, here's Mark Mullins phone number. You can call him. He'll be able to help you out. He's really fantastic." So you know if you do have timeshare, don't hesitate to call. We're not going to get a bite of the action or anything like that but we want to make sure people are taking care of and we have contacts. If somebody is, you know, interested in timeshare. Cindy And the difference is that you brought up. It's like you think, you know I hear people say, "I have a property on Maui you know talk to them further and it's like-- Oh, I'm sorry they're doing an EPS test.
Clint Oh right. Cindy Excuse me. If you hear the screaming, it's just the EPS test going on. But they say they have a property on Maui and then you add some further questions [inaudible] you get, oh well, you've got a timeshare. I don't think of that as a property on Maui but, of course, that's part of the selling thing. The people you're talking to. I do a cruise. As I call you I've got a place on Maui and you find out no, you get a timeshare and there is a big difference. And so can you correlate the process of maybe really getting a place on Maui is a--.
Clint Oh, comparatively. Cindy --a real home comparatively to a timeshare.
Clint Yeah. So one of the things, you know, I don't want to poo poo timeshare. You did mentioned that a lot of people think of it as a dirty word and I could get that. You know there's some negative connotation with how people treat the unit as opposed to really their own full ownership and especially in regards to upgrades and whatnot. But honestly, for Hawaii itself timeshares are fantastic, you know. Cindy Really?
Clint Think about it we're getting 50% more taxes. You know our service industry it's almost run more like a hotel so there's more jobs associated with it. You know timeshares are wonderful for Maui. They're really good. You know it's not really a wise investment. You know you certainly don't want to have, you know, people here. Why would they be purchasing a timeshare? You know it's not like you're going into a beautiful, tropical place. It's somewhere that you already live. But you know, it's not really bad for the people of Hawaii that aren't, you know, involved in the transaction. Helps unemployment, you know. It gives more opportunities and you know really good for our tax bases so it's not bad in that sense. It's just when people say it's kind of a dirty word. It's mostly just because of the complications associated of having multiple owners, the increased expenses. But when it comes to real property purchases, you know, whether that be commercial, residential, you know, condominium, you know, whatever have you-- I help people with vacant purchases of land too, all the time. It does tend to have a better financial incentive. You know there is more write offs associated with it. There's you know more clear cut processes to go through and and to get back to that in 1031 exchanges. That is actually a question that a lot of people ask me about.
Julie Well, there you have it. Now, you know the answer.
Clint That segue in and--.
Julie They have to have a deed.
Clint Yeah, they do. They do.
Julie Most of them do now. But there are some out there that don't. So that's always my first question.
Clint Yeah. But how are you going to get money from that little vacant land, right?
Julie Yes.
Clint So you know, you're going to have maybe some horses on it or something along those lines that are renting from you because let's just say, for example, I got a condo for $350,000 and some other state in the US. You sell that. You're purchasing a lot here in Hawaii.
Julie First of all, let me stop you right there.
Clint Yeah, yeah.
Julie If you're going to buy vacant land in your exchange,--.
Clint Precisely.
Julie --that qualifies for an exchange because it's real property. But when you go from depreciable property: condo and wherever--.
Clint With you have.
Julie --to non-depreciable property, vacant land you'll have depreciation recapture to pay. And that's taxed at 25%. So if you own the property for just a couple of years, it's not a big deal. But if you've own the property you're selling for 15 years, it might be substantial. So you always have to talk to your accountant--.
Clint Precisely.
Julie --from depreciable property to vacant land which is non-depreciable.
Clint And it really does-- just to define depreciable. That means something with, you know, depreciable assets on the property like a building or whatnot.
Julie Right. So if you own investment property, you have the benefit of depreciating the property on your tax returns. You should take that benefit. Every once in a while, I'll talk to somebody and I'll tell them about depreciation and they say, "Oh, that doesn't apply to me because I haven't been depreciating my property." And I'd have to say--.
Clint We'll you should have.
Julie --"Well, you should have because if you didn't do it, the IRS does it for you."
Clint Yeah.
Julie Okay. So it is a real thing. You just can't get away with it. But when you go from depreciable property in an exchange earnings to non-depreciable property. You have to consider that.
Clint [crosstalk] process.
Julie Though defer paying the capital gains tax and depreciation recapture has nothing to do with 1031 but it runs right alongside of it. So it's important fact for the clients to know.
Clint All right. It's a lot easier to go the other way then if you've got an investment banking chunk of land.
Julie Yeah, actually [crosstalk]. I love that idea by the way. I always ask you and other people, you know, if you have clients that owns vacant land, you know, maybe it's a legacy property. Maybe it's, you know, it's been in the family for years and it's so great and they haven't been doing anything on it now. Or they're not haven't done anything on it for 20 years. Why don't you sell it? Do an exchange and get into some income producing properties so you can pay for your aging parents' healthcare or your kid's tuition at a private school like make it work for you or start getting a business on that farm and make a farm.
Clint Yeah yeah.
Julie Grow some coffee.
Clint Get rid of those liabilities.
Julie Do something like that.
Clint Well, with the new--, you might be growing something else.
Julie Well, well. Whatever. La la la la la [laughter].
Clint That's actually a good thing that I've-- or one of the additional comments that I want to go into that surprised me and not something that you would know specifically about but I had somebody actually purchase a very, very small amount of a pot stock and they went in to go get a loan on their property and they weren't able to qualify.
Julie Yeah, the banks aren't working.
Clint Oh, no no. We're only talking a little bit of money. You know it was a few hundred dollars worth of a particular stock and I was like blown away. I thought it would only count on that small amount of income that you might be generating per say off of it. So, of course, they were still able to get a loan. They just weren't able to get a loan through an FDIC-based bank. You know they have to go through--. Cindy I think you need to repeat that. People do not notice I know some friends who like played the stock market and they'd been investing in those stocks because they've been going up. Are you saying repeat that again because this is news to I'm sure a lot of people?
Clint So this is an individual banking policy depends on the individual-- this is not like a federal regulation or anything like that but it comes into the federals because you know FDIC banks, you know, Federal Insured Banking System. If you are getting a loan from one of those like Wells Fargo or whatnot, it really depends. You got to talk to your individual lender. They might have policies that if you have any income associated or any investments associated with a federally-regulated substance such as marijuana they may inqualify you from able to-- being able to get a loan with them. Cindy Even if you're not using that money for anything to invest in a home.
Clint Even if it's a small amount. Cindy It still can disqualify you from--.
Clint Correct. Cindy I don't most people know the--.
Clint No, they don't. It was actually something that came up at two meetings ago and that's one of the reasons you really want to work with a trained professional lawyer. Not lawyer. A trained professional real estate agent such as my family. I mean my mom's had her license for 40 years. My dad's had his for, you know, over 36. I've had mine for 17 now and, you know, we have very unique situations come up all the time. I mean we're doing you know between the two of us close to 40 transactions. You know sometimes 50 a year and there's a lot of unique things that we learn throughout the process. So it is--. Cindy You could sell that stock within a certain amount of time.
Clint I don't know about that. It comes down to the individual. Cindy That's tricky.
Clint And again you want to talk to that individual loan specialist. In this case, we were able to confirm or get them transferred to a private money loan. They were able to pay almost the same exact rate that they were anyway and we just brokered it out through somebody else so it ended up not being any big issue. It did kind of delay the process a little bit. We had to get an extension that was, you know, beyond the control of the buyer. But at the end of it, it was a big shock to everybody. And you know that buyer was quite miffed. You know all of a sudden to be treated like a criminal for just making, you know, a secure investment, you know, something that's on an exchange process. It's like, wow, they had no idea that they could be, you know, hurting themselves in the future. Fortunately, we were able to find a solution.
Julie I think the lending institutions are slowly--.
Clint Adapting.
Julie --very slowly adapting but it's just too new and they're just not there yet. But I-- can I regress [inaudible] on 1031 exchanges [crosstalk]. That's okay. There's two things I wanted to bring up: loans, you are talking about loans. So if you are doing an exchange and you're selling your property and you're buying your replacement property and you're getting a loan and the lender says to you that you can get a second home loan. Right. Because people like to get the second home loan interest rate because it's cheaper than an investor rate loan.
Clint You don't want to do that.
Julie I'll tell you why. So maybe the lender has done it before on a straight up I'm buying an investment property but I can just do. I can get you the second home loan because there was no exchange attached to it.
Clint These rentals aren't there. Pay no attention.
Julie But if there is an exchange attached to it and your lender says, "Oh, yeah I can get you a second home loan." Double check with him and make sure that he checks with his underwriter because usually as soon as they see the down payment is coming from an exchange company, they're going to make you get an investor rate loan. And you don't want to find this out 10 days before closing that you don't qualify for your second home loan because you're actually buying an investment property. People run into that a lot and you know the lenders probably have done it before but it was just a straight out purchase. But when there's an exchange involved almost 99% of the time, the client has to get an investor rate loan.
Clint Again, another really important reason to talk to us about who you want to have your lender so we can recommend the proper person.
Julie Exactly. And one more thing I wanted to bring up. This is very common especially on Maui and the big island is for those of you who don't know. If you lived in a property, just your personal residence, two out of the last five years, if you sell it, if you're single, you can get 250,000 tax free.
Clint And married?
Julie If you're married, it's 500,000 tax free. So I get these calls kind of often where somebody will sell their property let's say it's upcountry and they're selling their personal residence and they're going to make over 500,000. So whatever is over 500,000 they have to pay taxes on and they go, "Well, I have an Ohana on the property and I rent that out. Can I do an exchange with that?".
Clint Just a portion.
Julie And I will say this is the first thing out of my mouth I ask them. Do you allocate a percentage of this address for investment taxes or do you pocket the money? And they go, ah, ah, ah I can't remember. So you know [crosstalk] as long as they're allocating the property properly, they could take advantage of the Ohana investment and they still could take advantage of their personal residence exemption.
Clint Fantastic.
Julie But they have to make sure their percentagizing their property properly on their tax returns to be able to take advantage of both of those.
Clint Now, let's say we're going to do the reverse of that say, for example, you're doing a 1031 exchange into a property and then for some hardship or, you know, putting all intent aside say for some reason unforeseen in a couple of years' time, you end up having to move into that investment property. Let's just say, you know, your house burns down or divorce situation or whatever.
Julie That's fine. Nobody says you have to hold it for investment forever. Again, it's all about your intent and hey if something changes you go, "Oh, my gosh my life changed, I had to move into it:.
Clint It does.
Julie I mean that's very arguable.
Clint But what happens if you--?
Julie But if you're flipping it--.
Clint No. Yeah.
Julie I mean even so you're going to have to show some kind of proof. And by the way, as far as I know audits are random so they don't just put you in a special stack because you're doing an exchange.
Clint No.
Julie Okay. Unless you're on some list. But you know most people don't [crosstalk]--.
Clint Let's not talk about that though.
Julie All good list. I've seen them. But they don't put you on a special list. But if you get audited, I always like to take you down the rabbit hole. If you get audited this is what they would look for. So make sure your intent to hold for investment is always there. You don't want to say I intend to buy this for an investment and hold onto it for two years and after, you know, two years, the day after two years, I'm going to move into it. I mean your intent just changed.
Clint Exactly.
Julie You know. So--.
Clint It's the question of why, what your intent is.
Clint Yeah, so if somebody has a heart issue--.
Clint If you can prove that.
Julie --or you know whatever and they had to move it. That's--.
Clint And that's one of those things.
Julie That's a very arguable.
Clint We're not tax accountants you know. We can't make those decisions for you. Let's say, for example, you happen to move into the property for one reason or another and then you know you go through it and sell it five years later maybe you can, you know, you know, have that $250,000 for personal exemption.
Julie You don't get at all anymore.
Clint Oh, that's right. Tell me a little bit about that.
Julie You don't get it all anymore. They prorate. So you--.
Clint Oh, that's five, five years or something like that.
Julie Yeah, you have to plan on owning it for five years. If you buy a property on an exchange that you eventually want to move into and then sell to take your personal residence exeption.
Clint It's not just two years anymore. It's five.
Julie You have to own the property for sure for five years and accomplish two things. First, you have to hold it for investment because you just didn't exchange. So that satisfies the exchange and then you have to show that you lived in it two out of the last five years to satisfy the personal residence exemption. So say you rent it for two. You live in it for two. I don't even care what you do with it on the fifth year but after the fifth year if you want to sell it you can. But you prorate now. You don't get the full 250 or 500. You have to divide how much.
Clint 50 basically a year. 50,000 a year.
Julie Yeah, so if you're interested in that kind of plan. You should give me a call so I can just give you that information. You can discuss it with your CPA.
Clint Precisely. Yeah because who knows maybe you live in it for the whole five years.
Julie Well, you can't if you didn't exchange. You'll have to rent it out first.
Clint Okay. Yeah. Well, no, let's just say you've owned it for 10 years or so.
Julie Oh, yeah yeah.
Clint So the same for the last five. So this is Clint Hansen with Maui Luxury Real Estate. That's mauirealestate.net, mauirealestateradio.com. We're broadcasting at 11:10 AM, 98.7 FM, 96.7 FM, the KAOI Radio Group. You can call me on my cell at 808-280-2764. We have Julie here. What's that new last name again?
Julie Bratton.
Clint Oh, it's going to take a long time. Sorry about that.
Julie All right Julie Tumbaga. Julie Bratton. But anyway, Bratton. And my phone number again is direct 808-524-6737 and my toll free is 877-591-1031. And my email again is J, for Julie, T like Tom, U, I'm like Mary. Oop, I shouldn't use my old one [laughter]. I got to use my new one.
Clint Yes.
Julie Sorry. J for Julie, B like boy, R-A-T-T-O, N like Nancy at Old Republic Exchange dot com.
Clint Aloha.
Julie Aloha.