Jason discusses a few current events and articles including the Hope Now Alliance, Home Preservation Foundation and President Bush’s plan to punish the prudent while rewarding the imprudent. More comments on Jason’s prediction of the coming global labor shortage and the massive inflation we will experience in the future.

In part two Jason interviews Dino Champagne with Asset Preservation, Inc. on 1031 Tax-Deferred Exchanges.

Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Newport Beach, California.  During this weekly program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, or a new slant on real estate, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.

Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk.  He’s been a successful investor for 20 years and currently owns properties in nine states.  This program will help you follow in Jason’s footsteps on the road to financial freedom through real estate.  You really can do it.  And now, here’s your host, Jason Hartman.

Jason Hartman: I’m here with Area Manager and Investment Counselor, Lynda Mulley, and she just returned from Kansas City and also Grand Junction, Colorado.  And Lynda, tell us about what you saw in Kansas City.

Lynda Mulley: Kansas City is a great market, Jason.  It’s very stable and solid.  It’s a market where there’s good growth and lots of things going on, and there are some great projects there that I took a look at that I think the investors would love to hear about.

Jason Hartman: Now, one of the things we always do is you’ve got to go buy your own house there –

Lynda Mulley: Yes.

Jason Hartman: – if you want to recommend the area to clients, and, of course, I’m already an owner in Kansas City.  I bought a four-plex there.  But tell us what you’re recommending today in Kansas City.

Lynda Mulley: What we have is a great single-family home, three-bedroom, two-bath, about 1450 square feet for $189,900.00.

Jason Hartman: Brand spanking new, right?

Lynda Mulley: Brand new, rent ready, close to schools and a beautiful shopping center, big upscale shopping center called Zona Rosa, which I had lunch at and just fell in love with.

Jason Hartman: Excellent.  What’s the projected return on investment?

Lynda Mulley: Projected investment return here is 34 percent based on our usual assumptions that we put on our performance projections and the loan that you could get.

Jason Hartman: Excellent.  Boy, 34 percent annually.  Don’t try that in a mutual fund or the stock market.  You probably won’t get it, but you can do it pretty conservatively and prudently with the right real estate investments with the right structure.  Lynda, thanks so much for talking about the property in Kansas City.

Lynda Mulley: You bet.  Thank you so much.

Jason Hartman: Hey.  I just wanted to announce a couple of quick things for you.  If you are interested in a Platinum Properties Investor Network franchise in your area, we are now approved for franchising in 18 states.  Please visit www.jasonhartman.com and click on the franchise link and fill out the short application.

If you are able to come to one of our live events, we would love to see you and meet you in person.  We’ve had people fly in from all over the US for them.  Tuesday, January 8, we have real estate investing using your IRA or other pension plan, other qualified plan.  That will be at our office here in Newport Beach, soon to be our old office.  Remember, we’re moving soon.  And that is from 6:00 to 9:00 p.m. on January 8.  Register at www.jasonhartman.com for any of these events.

Creating Wealth, our core program, our main educational event, is Saturday, January 12, from 10:00 to 4:00 at our office in Newport Beach.  We have a mini Creating Wealth on January 15 at a location to be announced in the San Diego area, so visit www.jasonhartman.com for details on that one.  We have a conference call about declaring financial independence Tuesday, January 29, and that’s on the telephone so you can join in from anywhere, details at www.jasonhartman.com.  And then we have another mini Creating Wealth Wednesday, January 23, here at our office in Newport Beach.  That’s a weeknight event.

Our one in a year so far Masters Weekend event, this is a very special event where we fly in experts from all over the United States.  We call this the Masters Weekend: A Gathering of Experts, and this is planned for March 8 and 9 at our new offices in Costa Mesa near South Coast plaza in California.  So hopefully you can join us for some of those events.

Also remember our rental coordinator is here to help with your rental properties.  If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help, and we stay with you through the life of the investment, so feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.

Also want to remind you, listen to our old podcasts.  At least go back to Podcast No. 13 forward and listen to all the podcasts after that.  You’re welcome to listen to all of them.  The ones before No. 13 are older, but they’re also good, but the newer ones, No. 13 and forward, which are really good ones to listen to, so please take advantage of that.

Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com.  Remember that we are not tax or legal advisors.  So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.

This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.

So we’ll go into depth on that.  Will not help investors; it only applies to homeowners, so these condo buyers are really going to be in a real pickle.  Okay, enough negativity.  On the good side, the global prosperity boom continues in all sorts of interesting ways.  Business Week article November 19, “The employee is always right.”  This is on Page 80 of Business Week.  It says, “At India’s HCL Technologies, workers get to grade the boss and everybody can see the ratings.”

Now, why do I say this?  Well, I announced this to my own team here and I said that this was not going to be in effect at Platinum Properties so don’t get any ideas.  But what’s interesting, and what’s happening all around the world which is good news for us as real estate investors, is there is a giant global prosperity boom.  And the power shift is going on from employers – which in many countries used to have the power – to the employees.  And what this means is that employees in India and China are becoming more educated and in more and more short supply on an ongoing basis.

So what does this mean to us as real estate investors?  Well, it means a few things.  No. 1, it means that as we have more global prosperity, we have more buyers chasing a limited number of assets.  And in a future podcast we’ll talk about this in more detail, but in the past we have talked about it.  Go back and reference some of the old podcasts if you want to hear more.

We talk about how what I believe in is not really real estate investing as most people think of it, but I believe in packaged or assembled commodities investing.  And what you’re basically buying is we’re buying in areas with very low land value, cheap, cheap land, so it’s not about the land, although, of course, one of the famous things that real estate investors have always said is, “They’re not making any more land.”

Well, that’s fine and dandy, but with a global prosperity boom of epic proportions, something that has never before happened in human history ever in anybody’s lifetime, you have prosperous people all around the world, even if they’re just middle class or lower middle class, starting to consume the raw materials that are the ingredients for the real estate.  And I really shouldn’t even say the real estate – the structures, the houses, the apartment buildings, the shopping centers, the industrial buildings, whatever they are.

The buildings we are investing in in 35 markets around the United States, they are consuming copper wire, concrete, lumber, petroleum products.  Do you have any idea how much petroleum related products – when the price of oil goes up, how much petroleum related products are in these structures?  I mean, what about the insulation?  What about the insulation of the wires?  What about the copper in the wires?  We’ve seen all these commodities increase dramatically in price over the last several years, and I say they will increase a whole lot more in years to come as we see more and more prosperity around the world.

So we see this power shift going on between employers and employees, and several other articles read about it as well, so we see this.  We see people becoming more prosperous.  They are demanding more.  They want better lives.  They want more money.  There is a shortage of these people around the world, even in India and China.  What does that mean next?  The question is we have hidden inflation very successfully for several years by outsourcing manufacturing to China and to India.  Well, to India call centers and things like that and software development, but manufacturing to Asian countries a lot.

The question I have for you is this: Where do we outsource next?  Where do we go for the next huge pool of ultra cheap labor as these employees in these countries start to demand more and more?  And you’re seeing these sort of labor shortages going on.  Now, they’re not extremely bad like they are in the US, but it’s amazing that they’re happening in other countries.  There is not an unlimited supply of cheap labor around the world.

So this labor gets more expensive; that means the price of all these goods and services increases.  That means inflation is not hidden as much as it used to be and these people become more prosperous.  So you have two things going on simultaneously, and this will create more buyers for our properties, more buyers for the ingredients of our properties as there’s more consumption, and it will create higher prices for all of the products that we are constantly buying made in China over and over.

So we’re going to see more and more expensive products in the future.  That means more inflation.  Now, if we finance our properties correctly, and if you’re following our plan here at Platinum Properties Investor Network, you know that inflation is your best friend because it increases the value of property, the value of the component parts of your structures sitting on your land, and the price of the land, as well.  But it also makes your debt cheaper to pay back.  Go back and listen to the podcast entitled “The Great Inflation Payoff” for more on that.  It’s one of the really great hidden benefits of real estate investing.

Okay.  Business Week, Page 68, and this is the November 19 issue again.  The mortgage resets will keep on coming.  Now, the resets are when these adjustable-rate loans increase.  The payment is at a low teaser rate and then we see an increase.  It says, “Some mortgage market commentators have noted that the peak months for resets, when the vast number of these adjustable sub-prime notes with their initial teaser rates of 2 percent or 3 percent rise to a much higher rate for the duration of the loan, are December through March.”  And that is true.  In fact, March of 2008 will be the biggest year for that.  It will be double the amount of resets we had in October of 2007.

But they’re arguing sub-prime defaults will pick up in the coming months but then taper off, but sub-prime are not the whole picture.  They’re not the whole story.  Factor in the myriad other forms of adjustable-rate mortgages written at the height of the housing bubble when lenders relaxed their lending standards, and I say that was very irresponsible for them to do that, but it’s what they did and here we are with the result of that and resets are going to be a problem for the next four years.

According to Zelman & Associates, a New York institutional research firm, the reason: More than $400 billion of recently written option ARMs and Alt-A – so Alt-A is better than sub-prime but not perfect – loans have five-year teaser rates that will likely reset to much higher payments in 2010 and 2011.  There could be even more trouble then, so that’s what’s you’re seeing coming up.

What does that all mean to us?  It means we will see, in my eyes, a continued strengthening of the rental market because some people who were getting into these loans they could never afford will be forced back into the rental market, either by foreclosure or they will not be able to qualify for a loan and buy a house in the first place.  And we’ll see how this Bush plan where the Secretary of the Treasury went to all the lenders.  We’ll talk about that on the next podcast.

Next up I have an interview that I recorded just last week talking about 1031 exchanges, a subject we have not covered on the podcast before, and one of the terrific benefits of real estate.  See, when you can trade your real estate, you make nice gains on it and you’re allowed to sell it on 1031 tax-deferred exchanges.  1031 is the section of the IRS code that allows you to do this.  You can trade your real estate all your life and constantly defer the gain and never pay the tax.

This is a very good deal.  Think about it.  If you sell a business that you own and you have a gain, you have to pay the tax.  Now, the GO Zone can help you with this.  Go back and refer to our two podcasts a little while back on the GO Zone, which is a terrific opportunity, but it’s about the only way I know of around paying the capital gains tax.

Also, if you sell stocks, even if you win in the stock market, when you sell the stocks, you cannot exchange them for another stock.  You have to pay the gain and then go reinvest and buy another stock.  Well, real estate offers some great benefits to that so listen in to this recent interview talking about 1031 tax-deferred exchanges.  And I also just want to remind you that we are not tax or legal advisors, so anything that you learn on our podcast that has a tax or legal issue to it – we are real estate specialists – go to your appropriate professional and check it with them.  We are giving you conceptual information that you need to talk to your professional to see how it applies to you, so let’s listen.

I’m here with Dino Champagne of Asset Preservation, Inc., and we want to talk to you today about a subject that many investors have heard a little bit about but may not know the details of.  It’s one of the great, great advantages of owning and investing in real estate because, as I’ve said before, real estate is the most tax-favored asset in America.  And one of the big benefits of it are not just the tax benefits you get along the way, but unlike stocks you can sell the real estate and constantly defer, defer, defer and never pay tax on the gain until you pass it on to your heirs, and there are even ways around that.

So we’re not tax advisors and we’re not talking specific tax, but the subject today is of 1031 tax-deferred exchanges.  And Dino, welcome to the show.

Dino Champagne: Thank you, Jason.

Jason Hartman: It’s great to have you here.  Tell us, what is a tax-deferred exchange?

Dino Champagne: Basically, a tax-deferred exchange is actually a part of the tax code.  Sometimes people refer to it as a tax loophole, and it’s not a tax loophole.  It’s a legitimate –

Jason Hartman: A loophole would imply something not legitimate, right?

Dino Champagne: Well, not legitimate but ways around the legitimacy of things, but 1031 is a part of the tax code and it gives the investor an opportunity to take that money, and basically what they’re doing with it is buying more.

Jason Hartman: Right.  And so the IRS wants to incentivize people to invest in real estate; more specifically even provide rental housing, so that’s one of the forms of real estate that’s eligible for a 1031 tax-deferred exchange.  And they want to encourage them to stay invested, right?

Dino Champagne: Pretty much, yeah.

Jason Hartman: Yeah.

Dino Champagne: Don’t pay the taxes, but you’re given an opportunity to get more to build up your portfolio, so it has a lot of good advantages as to why you would want to do a 1031 tax-deferred exchange.

Jason Hartman: That’s excellent because when I sell a stock, I’ve got to pay capital gains on it if I make money.

Dino Champagne: Yes.

Jason Hartman: And that’s a big “if,” too.  Also a couple years ago I sold my business, and I remember asking my CPA at the time, I said, “Hey, can I buy another business and defer the tax liability?”  And he said, “No.”  And I said, “Well, can I buy some stocks?”  “No.  You can’t do anything.”

You’ve just got to pay the tax and that’s the end of the discussion.  The only thing I do want to say on this podcast is refer back to the two prior podcasts we had on GO Zone tax investing because that’s a pretty exciting thing but not the subject of today, so there actually is a way to maybe get that capital gains you paid back.  But the 1031 exchange is a really simple way around paying the capital gains tax.  Now, what are some of the main benefits of a 1031 tax-deferred exchange, Dino?

Dino Champagne: Well, probably the biggest main benefit to a 1031 tax-deferred exchange is the tax dollars that you might have to earmark to your local state and actually the federal government.  You can utilize those funds, and we like to say “interest free” because you can continue to do this.  As you mentioned early on, you could do this more and more and more.  So instead of having to write a check to Uncle Sam, and I like to say Uncle Arnold because we live in California.

Jason Hartman: Right.  Yeah, the People’s Republic of California.

Dino Champagne: Yes, exactly.  So instead of giving the government the funds, as an investor you have an opportunity to take those funds and add to your investment portfolio by buying more.  There’s no timeframe as to how long you can keep doing this.  As you said earlier, you can do this until you die.

Jason Hartman: And you can do it as many times as you want.

Dino Champagne: As many times as you would like, yes.

Jason Hartman: Excellent.  Can you explain some of the terminology of just kind of the buzzwords, the lingo that is used in the 1031 exchange world?

Dino Champagne: Yes.  Some of the words that you might hear when you’re talking to someone doing a 1031 exchange or a company that facilitates the exchange is, first of all, we’re known as a qualified intermediary, so we’re a necessary function to doing the 1031.  So you might hear the term QI or accommodator.  We are the entity that is going to facilitate the transaction.

Another term that you’re going to hear that is quite common is boot, and I always like to say, “Boot is not the shoe sale at any department store.”  Boot in the 1031 world basically means taxable.  So when we talk boot, we’re saying that you will have to pay tax to the amount of gain recognized on that particular type of boot.  And there’s two types of boot predominantly, cash boot and mortgage boot.

Jason Hartman: Maybe we’ll get to that a little later.  I know those are sort of a tad complicated, but let’s talk about qualified intermediaries for a second.  One of the things that I think people should know is if you’re in a state where they have escrow like California, many of our clients, what they’re doing is they’re selling California rental properties and then they’re doing 1031 tax-deferred exchanges and they’re diversifying and growing their portfolios by investing with us in the 35 markets throughout the US that we cover.

And one of the things that people should know about QIs or qualified intermediaries or accommodators is you don’t use these instead of an escrow company.  You use them in addition to an escrow company, right?

Dino Champagne: Without question.  You cannot do a 1031 exchange without having a qualified intermediary, so the escrow or the title company or the closer, depending on the state that you’re into, they have their role in the transaction and the qualified intermediary has its role in the transaction.

Jason Hartman: Excellent.  Your colleague, Kathy Biewenga, who has spoken at several of our seminars in the past and come in and done seminars for us on 1031 exchanges and so forth, she told me – and I was really amazed at this, Dino – that the QI or accommodator intermediary industry is very unregulated, and that’s scary and I think this is a good word of caution for investors.  I mean, think about what happens when you sell a rental property and you might have $100,000.00 in gain that you want to defer, or maybe you have $1 million or $10 million, whatever the number is, it’s a lot of money.  And the accommodator or the qualified intermediary holds this money, right?

Dino Champagne: Yes.

Jason Hartman: Could they just take off with it?

Dino Champagne: Regrettably, on occasion that has happened.  We are – as Kathy might have mentioned to you in prior podcasts, we’re for the most part a regulated industry.  That is starting to change a little bit from state to state.

Jason Hartman: Good.

Dino Champagne: But the primary concern that an investor should have in choosing a qualified intermediary is obviously what is that qualified intermediary’s expertise, but what is the level of security that they have?  Because we are holding billions of dollars in our industry.

Jason Hartman: Yeah.

Dino Champagne: And I didn’t say “M,” I said “B,” billions.

Jason Hartman: Yeah, billions with a “B.”  Yeah, that’s a lot of money so be careful.  Don’t get some little, small qualified intermediary.  You may find your money gone, so that’s a good word of caution.  What is constructive receipt?

Dino Champagne: Constructive receipt basically means that’s a situation where if you’re not dealing with a qualified intermediary – in this particular situation you talked about escrow – you need escrow to do one function, but escrow is not necessarily the qualified intermediary.  We serve separate roles.  And for example, constructive receipt might be if you’re selling a property in Southern California and then you’re going and you’re buying a property in one of the states that you’re selling in.

Jason Hartman: Texas, Alabama, Georgia, whatever.

Dino Champagne: Texas, Alabama, right.  And so you’re saying, “Okay.  Well, I’m closing because I found my property already, and I’m closing within 24 hours so I’m just going to have the escrow company in California wire the funds directly to the closer in,” we’ll say Alabama for this discussion, and think you’ve completed an exchange.  Constructive receipt basically means that you as the taxpayer had access to the funds.  Although you did not physically have them, you were the party telling escrow where and when to wire the funds.

Jason Hartman: Yeah.  So it’s not arm’s length in other words.

Dino Champagne: Right.

Jason Hartman: You have control whereas to complete the exchange and qualify for it, the accommodator has to have control, right?

Dino Champagne: Exactly.

Jason Hartman: Yeah.

Dino Champagne: Because we, in effect, step in the shoes of the taxpayer selling the relinquished property and buying the replacement property.  We definitely have to be there to comply with the Treasury regulations.

Jason Hartman: Excellent.  So we don’t want constructive receipt.

Dino Champagne: No.

Jason Hartman: We want to avoid constructive receipt.  Excellent, okay.

Dino Champagne: Without question, yes.

Jason Hartman: Yeah.  And a lot of people get confused.  They think, “Well, I didn’t take the money so I don’t have constructive receipt,” but they do.  Good point.  Now, here’s another buzzword that’s commonly used in your industry, and I know that we have investors that come in and they really don’t understand what this one means.  What does the term “like kind” mean?  I hear like kind exchange, and a lot of people are somewhat confused about that I’ve noticed.  I know the answer, but you tell us.

Dino Champagne: Well, the interesting thing is like kind does not mean the words – it’s not literal.  So in other words, if I’m selling a single-family rental to comply with the words like kind, I do not have to buy a single-family rental.  I as an investor at this point can choose to maybe trade up to an apartment building or maybe even a shopping center, or I can go from raw land to an office building or to a commercial building.  So like kind basically means – and if you keep this in mind as an investor – real estate investment for real estate investment, so you’re buying investment property.  It’s not the grade or the quality; it’s the nature and the character.

Jason Hartman: Oh, that’s a good point.  So that means certainly your personal residence does not qualify for a 1031 or like kind exchange.

Dino Champagne: If the last use of the property is your primary residence, that’s correct, it does not qualify.

Jason Hartman: Yeah, excellent.  Good point.  Okay.  Now, when you talk like kind, just a quick point of inference.  It’s kind of funny to me, but airplanes qualify for 1031 exchanges, right?

Dino Champagne: If the airplane is used for trade or business or for investment purposes.

Jason Hartman: Okay.  And what about cows?

Dino Champagne: Well, cows can qualify for cows, and – now, when we’re getting into what you’re referring to now, Jason, is what’s called a personal property exchange.

Jason Hartman: Okay.

Dino Champagne: And therefore you cannot go from a single-family rental to an airplane.

Jason Hartman: Right.  But you can go airplane to airplane or cow to cow, right?

Dino Champagne: As long as it falls within the same North American industrial standard code.  And I know it sounds like a mouthful, but it gets very, very specific.  So as I illustrated earlier, in the real estate side of this, it’s very broad in definition for like kind, but when we get into the personal property side it becomes much, much narrower.

Jason Hartman: Oh, very, very good to know.  Very good to know, and I know a lot of people that have airplanes, they’ll get these big bonus depreciations on them and then they’ll want to sell them, and you really want to avoid that because then you have to pay taxes on that accelerated depreciation.

Dino Champagne: Without question, yes.

Jason Hartman: Yeah.  That’s why they exchange them.  That’s good, yeah.  Okay.  So primary residence doesn’t qualify for an exchange obviously.  Can someone make their primary residence qualify for an exchange by renting it for a time, and if so, how much time?

Dino Champagne: Well, a couple of questions going there.  Can they change the use of the property from a primary residence to a rental?  And the answer to that would be yes.  Now, the $64,000.00 question is how much time do they have to convert it for a rental in order for it to be declared an investment property?  And that’s the question we get all the time, “How long?”  And there is nothing in the tax code that says how long you have to hold a property for it to be declared held for investment purposes.  You need to address this with your tax or legal advisor.

Jason Hartman: They consider it a matter of intent, right?

Dino Champagne: Yes.

Jason Hartman: But the problem is a lot of investors get themselves into trouble with this because intent is kind of an opinion.  The IRS may have a different opinion than the taxpayer, right?

Dino Champagne: The bottom line is how good is your story in case you’re ever audited by the IRS or the Franchise Tax Board or whatever taxing entity in the states.

Jason Hartman: Okay.  On a rental property, we’ve had a lot of people doing these very imprudent investments in the last several years when we’ve had this kind of crazy market where anybody can make money, which I’m glad that’s kind of changing in a way because now we get back to the real fundamentals of investing.  And people will be out flipping properties.  I’ve heard that you have to hold the property a year and a day to qualify if it’s a rental property always.  So I know you’re not a tax advisor, and we’re certainly not tax advisors, either, but do you want to give us a guideline for that that maybe people can go back to their tax advisor with?

Dino Champagne: Well, the year and a day comes into play when we’re talking about the long-term capital gain rates, and that might be why some have a test of being a year and a day because when we have an asset that we’ve held for more than a year, we get preferential tax rates on the sale of that asset, and right now under current law it’s 15 percent.  Okay.

Jason Hartman: Versus if it’s less than a year it would be ordinary income, right?

Dino Champagne: Ordinary income, correct.  Right.

Jason Hartman: Okay.  Which is a much higher tax rate.  Depends on the taxpayer’s tax bracket.

Dino Champagne: Exactly.

Jason Hartman: Okay.

Dino Champagne: So that’s why some might use that particular test as being a sufficient timeframe to hold an investment piece of property.

Jason Hartman: Now, I’ve heard, though, if they buy the rental, they really do have to hold it a year and a day to qualify for the 1031 exchange, but that’s not exactly the way it is you’re saying?

Dino Champagne: No.  Not under current tax law, no.

Jason Hartman: Oh.

Dino Champagne: Now, as we all know, laws are constantly evolving so you all –

Jason Hartman: And they’re always subject to interpretation.

Dino Champagne: Without question, but – and the concern is that if you have a particular plan, check with your tax advisor because laws do change.  There are things in the works right now that say if you acquire a property that as a part of an exchange they’re considering putting a mandated hold time on that.  It is not passed at this point, so right now there is no safe holding period.

Jason Hartman: Okay, super.  Dino, are there any specific rules to qualify for a 100 percent tax deferral?

Dino Champagne: Yes, there are.  The IRS’s middle name is revenue, and so in order to defer from giving them that revenue, they want you to comply with certain rules.  One of the key components that you’re looking for as an investor and you’re going to do a 1031 exchange is that you have to buy property that’s equal to or greater than the value of the property you just sold.

Jason Hartman: So you have to buy more.

Dino Champagne: That’s –

Jason Hartman: Right, okay.

Dino Champagne: – for the 100 percent deferral, yes.

Jason Hartman: Okay, good.

Dino Champagne: For the 100 percent deferral, your target is equal to or greater than what you just sold for.  Now, as a component as most investment properties we have loans on them, so you have to replace the loan that you had on the old property to the loan on the new property.

Jason Hartman: Otherwise you have what’s known as mortgage relief, right, and that’s boot?

Dino Champagne: Mortgage relief or boot.

Jason Hartman: So when the mortgage balance goes down, that is considered boot and it’s taxable.

Dino Champagne: Yes.  In one respect, but there is a caveat to that is that you can lower your mortgage as long as you’re bringing in cash from outside of the exchange.

Jason Hartman: Ah, okay.

Dino Champagne: Okay.  So if you’re selling say for $500,000.00 and you’re buying for $500,000.00, and hypothetically you have a $300,000.00 loan, forgetting closing costs at this point, but let’s just say you have $200,000.00 cash.  But if you buy a $500,000.00 piece of property and for some reason you want to have only a loan of $200,000.00, then you’re going to have to get that extra $100,000.00 from somewhere, and it’s usually going to come from outside of the exchange.  So in that case, lowering the debt would be okay.  But for most cases, if you go down in debt you’re going to end up with mortgage relief or mortgage boot.

Jason Hartman: Okay.  So in other words, to kind of simplify this because it is a little complicated, especially on an audio only, if you go down in mortgage or down in price, watch out.

Dino Champagne: Correct.

Jason Hartman: That may be a problem, right?

Dino Champagne: Yeah.

Jason Hartman: Well, down in price definitely is a problem, right?

Dino Champagne: Yeah.  I mean, you have potential to pay tax on the gain, yes.

Jason Hartman: Okay.  Talk a little bit about the time limits, if you would.  I know there are delayed exchanges, reverse exchanges, starker exchanges.  What are all these things?

Dino Champagne: All these things add up to one thing.  You have 180 days after the close of your relinquished property to complete the acquisition of your replacement property.  Now, within that 180 days, you have 45 days to identify any property or properties that you would like to acquire.  Now, there’s also another component, Jason, to the 180-day timeframe.  It says under the tax code that the taxpayer has 180 calendar days or their tax filing date, whichever is earlier, to complete the exchange.

So right now because we’re in that particular timeframe, and probably most of the people listening to this podcast are calendar taxpayers which basically means we have to file our returns on April 15 of the next year for the prior year’s tax year, that means that if I close on a transaction between right now because next year’s a leap year, October 19 through December 31, I don’t have the full 180 days because my tax filing date comes in before the 180 days.

Jason Hartman: Wow.

Dino Champagne: So therefore – yeah.

Jason Hartman: I never heard this before.  I didn’t know this.  That is scary.  A word of caution to listeners.  That may be an incredibly valuable thing you just told our audience.

Dino Champagne: Well, especially if they’re closing on this time of year, without question.  Hopefully, you have a competent tax advisor that would be looking at your returns, and if they see that you haven’t completed the purchase of your replacement property before you file your tax return, they’ll say, “Okay.  We need to stop.  When are you going to close on your purchase?”  And if they say, “Well, it’s not going to close until, say, April 30,” then you’ll have to file an extension on your tax return in order to get the benefit of the full 180 days.

Jason Hartman: Okay.  So let me ask a question about that.  So if you file – like some people are really thinking they’re doing a great job and they file early.  They file in February, late February they’ll get the taxes filed, and it’s the filing date versus the due date because you can extend twice, right, for an individual?  I think you can get back to October 15.

Dino Champagne: I think it’s October 15.  I think they got rid of the September date, yeah.

Jason Hartman: Don’t quote us on that, but yeah.

Dino Champagne: So here’s the thing.  If you had not completed the purchase of your replacement property before you file your tax return and you’re running into that April 15 date, you do not file your tax return until you’ve completed it or you need to file an extension to give you the full 180 days.

And I know what I’m saying can get very confusing, especially if you’re listening to it.  So the bottom line is if you’ve closed between October 19 of say 2007 and December 31 of 2007, do not file your tax returns until you’ve completed the purchase of your property because at that point it will give you the 180 days, but you’ll need to file an extension on your return to get the full 180 days.

Jason Hartman: Dino, I bet a lot of people make a mistake on that.  That seems like an easy mistake to make, so that’s very scary.

Dino Champagne: It would be, yeah.

Jason Hartman: Good advice.  I’m glad you told us that.  But it is 180 days maximum no matter what, so that’s a good thing to know, too, yeah.

Dino Champagne: Exactly.  So yeah, so your extensions to October will make no difference –

Jason Hartman: Right.

Dino Champagne: – because the 180 days is going to come long before.

Jason Hartman: Yeah, right.  That’ll come over.  What else do you want to say on that, anything else?

Dino Champagne: It’s just watch the timeframes, and the fact that – also be aware that the 180 days are calendar days.  It’s not business days so you need to be very careful of when that 180 days falls because if it falls on a Saturday or a Sunday or a legal holiday –

Jason Hartman: You’ve got to get it done before that.

Dino Champagne: – you will need to be closing before, not after, so watch those dates.  Work with a qualified intermediary that’s going to keep reminding you of when those dates are, but ultimately it’s the taxpayer’s responsibility to stay on top of that.

Jason Hartman: Okay.  How many properties can someone identify?  Another way to say this, by the way, and maybe we’ll introduce a couple of other terms, is property you sell.  You called it the relinquished property.  That’s the property you sell, and I’ve also heard that referred to as the down-leg property, and then the properties you buy, the new ones you invest in are the up-leg property, right?

Dino Champagne: Yes.

Jason Hartman: And so how many up-leg properties can you buy?  You’re selling one down-leg property, getting rid of that and then buying more.  How many can you buy in this one exchange?  I know you can do it a bunch of times throughout your life.

Dino Champagne: Well, that’s interesting because the IRS gives the taxpayer basically three rules that they can choose from.  The first one which is the most commonly used rule is the three-property rule, and I have to tell you the majority of the exchanges that we do fall under the three-property rule.  So as a party doing an exchange, I can identify up to three properties without regard to fair market value, so – but I’m limited to the number of properties I identify, not to the dollar amount.

Now, let’s just say you’re selling in Southern California and you decide that you really want to maximize and you want to buy in Alabama or Tennessee or Georgia or somewhere.  Then you might be buying a single-family rental which would have probably a lower value property and you might want to utilize this code to get more properties.  But you know you’re going to be –

Jason Hartman: That’s what I did on my last exchange I did with you guys.

Dino Champagne: Yeah, right.  Yeah.  And so what you’re looking at, you say, “Well, I know I’m going to be buying more than three properties,” so now there’s two other rules that you could fall into.  The first one is the 200 percent rule which means that the taxpayer can identify more than three properties, but when you add up the fair market values of the properties you’re identifying, it cannot exceed 200 percent of the value of the property you have just sold.  So if I sell for $500,000.00 and I identify six properties, when I add up those properties, the values cannot exceed $1 million, so that’s an option.

If I am going to buy more than three properties and I want to really leverage and I want to get more than $1 million in value using the example I just gave, then I can default to the 95 percent rule.  And the 95 percent rule will allow me to identify as many properties as I would like without regard to fair market value.  Now, before you start getting all excited about this rule, let me just tell you

Jason Hartman: I’m still confused.  I can’t get excited yet.

Dino Champagne: Let me just tell you that with the 95 percent rule, you have to acquire 95 percent of the fair market value of the property you have identified.  So one of the ways that I say it in a very conservative way, you need to buy all of the properties you have identified or you do not have an exchange.

Jason Hartman: All right.

Dino Champagne: That’s a very conservative way of explaining the 95 percent rule.

Jason Hartman: By the way, talk for a moment if you would, Dino, about identification.  Who determines identification?  I’ve heard there’s some fraud in this world.  In fact, I remember talking with an investor that he thought he was going to beat the system one time, and I’m like, “You’re crazy to try and do this.”  But how do you determine identification?  Because that’s 45 days after the close –

Dino Champagne: Correct.

Jason Hartman: – of the relinquished property or the down-leg property, right?

Dino Champagne: Correct.

Jason Hartman: And then 180 days to close the new one.

Dino Champagne: Yeah.  And then the 45 – if you remember what I said earlier, the 45 is within the 180 days.

Jason Hartman: Yeah.  So it doesn’t add to it.  That’s a very good point, yes.

Dino Champagne: Within, yes.  So how do you identify?  The Treasury regulations state that, first of all, it must be in writing.  It must be unambiguously described, so in other words if you’re buying raw land, you’re going to be giving the legal description or the APN number of the city and state.  If you’re buying a building, generally the address or the APN number of the city and the state that it’s in.  It must be signed and dated by the taxpayer, so in other words the taxpayer is going to sign their identification letter.  It has to be sent by midnight of the 45th day to either the qualified intermediary – and we get most of the ID letters – or someone who is a party to the transaction who is not an agent on behalf of.

Now, interestingly enough, you mentioned that there is some fraud in that department.  The IRS is also looking at now expanding the identification to say not only when you identified and with the property you identified, but the taxpayer ID number for the party that you identified with.  Okay.  So that’s going to become a very crucial component when they come out with this probably in the 2008, maybe 2009 returns.

But the reality is that you can’t call it up.  They tell you in stocks you can’t leave the stock trade over the phone, but it must be in writing.  If you let’s say circumvent the system because there are some people that might be accommodating, accommodators out there, you in essence are committing what’s called tax fraud.  And tax fraud is a felony and it is a punishment by imprisonment if they choose to do that.

Jason Hartman: Doesn’t sound like any fun.

Dino Champagne: And not to mention that one of the famous cases we refer to all the time in regards to this is the Dobridge case, and that’s where they were convicted of tax fraud.  They had – their exchange obviously was invalidated, and they had – their tax liability was $2.2 million, and then the IRS imposed a tax fraud penalty of $1.6 million on top of all that.

Jason Hartman: Wow.

Dino Champagne: So it’s not something you want to fool with.  Planning is very important in this system, and you don’t want to abuse the system and have it go away because people were cheating it.

Jason Hartman: Yeah, good advice.  Very good advice.  Okay.  Anything you want to say in closing about 1031 tax-deferred exchanges?  It’s such a great benefit.  This is one of the things I love about real estate is you’re not paying tax on your profits.  You can put them back in and let them ride longer.

Dino Champagne: Well, the one thing I would want to say is if you’re considering selling an investment piece of property, it’s always prudent to talk to your tax advisor prior to the transaction just to make sure that doing a 1031 tax-deferred exchange is something necessary because there might be something in your return that could either mitigate the tax liability and therefore doing an exchange is not necessary.  And also talk to a qualified intermediary as to what are the rules of the exchange because although we’ve only talked on very few – a very small section of the code, there is so much more to this.  And, in fact, the information that you’ve been given is more dangerous than anything.

Jason Hartman: Yeah.

Dino Champagne: So don’t take this to mean everything there is about this code.

Jason Hartman: There is a lot more to know, but these are the basics.

Dino Champagne: Yeah.  But talk to a competent qualified intermediary because you want to know that the transaction you’re headed toward makes sense to do an exchange financially and how you’re structuring it is going to work under a 1031.  So ask, ask, ask.  No question is silly.

Jason Hartman: Very excellent advice, Dino.  Well, thank you so much for being with us today and talking about 1031 exchanges.  If you’d like to know more about this subject, visit www.apiexchange.com.  That’s Asset Preservation, Inc., so www.apiexchange.com or call Dino or Kathy at 866-857-1031; 1031, what a great phone number, huh?

Dino Champagne: Yes.

Jason Hartman: Thanks for coming in.

Dino Champagne: Thank you, Jason.

Jason Hartman: I’m here with Area Manager and Investment Counselor, Lynda Mulley, and she just returned from Kansas City and also Grand Junction, Colorado.  And Lynda, tell us about what you saw in Kansas City.

Lynda Mulley: Kansas City is a great market, Jason.  It’s very stable and solid.  It’s a market where there’s good growth and lots of things going on, and there are some great projects there that I took a look at that I think the investors would love to hear about.

Jason Hartman: Now, one of the things we always do is you’ve got to go buy your own house there –

Lynda Mulley: Yes.

Jason Hartman: – if you want to recommend the area to clients, and, of course, I’m already an owner in Kansas City.  I bought a four-plex there.  But tell us what you’re recommending today in Kansas City.

Lynda Mulley: What we have is a great single-family home, three-bedroom, two-bath, about 1450 square feet for $189,900.00.

Jason Hartman: Brand spanking new, right?

Lynda Mulley: Brand new, rent ready, close to schools and a beautiful shopping center, big upscale shopping center called Zona Rosa, which I had lunch at and just fell in love with.

Jason Hartman: Excellent.  What’s the projected return on investment?

Lynda Mulley: Projected investment return here is 34 percent based on our usual assumptions that we put on our performance projections and the loan that you could get.

Jason Hartman: Excellent.  Boy, 34 percent annually.  Don’t try that in a mutual fund or the stock market.  You probably won’t get it, but you can do it pretty conservatively and prudently with the right real estate investments with the right structure.  Lynda, thanks so much for talking about the property in Kansas City.

Lynda Mulley: You bet.  Thank you so much.

Jason Hartman: Hey.  I just wanted to announce a couple of quick things for you.  If you are interested in a Platinum Properties Investor Network franchise in your area, we are now approved for franchising in 18 states.  Please visit www.jasonhartman.com and click on the franchise link and fill out the short application.

If you are able to come to one of our live events, we would love to see you and meet you in person.  We’ve had people fly in from all over the US for them.  So hopefully you can join us for some of those events.

Also, if you are interested in career opportunities with us, our company is growing quickly and we would love to talk with you about career opportunities.  Also, remember our rental coordinator is here to help with your rental properties.  If you need assistance with your rentals, your property managers, your advertising, remember we’re here to help, and we stay with you through the life of the investment, so feel free to call our office anytime and ask for the rental coordinator for assistance on your rentals.

Also want to remind you, listen to our old podcasts.  At least go back to Podcast No. 13 forward and listen to all the podcasts after that.  You’re welcome to listen to all of them.  The ones before No. 13 are older, but they’re also good, but the newer ones, No. 13 and forward, which are really good ones to listen to, so please take advantage of that.

Be sure to see appropriate disclaimers and disclosures on our website at www.jasonhartman.com.  Remember that we are not tax or legal advisors.  So give us a call on any of these issues, and remember, we are here to help, and we will look forward to talking to you on the next podcast.

This material is the copyrighted creative work of either Jason Hartman, the Hartman Media Company, Platinum Properties Investor Network, Incorporated or the J. Hartman Company, all rights reserved.

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Duration:  47 minutes