78. Introduction to 1031 Exchanges with Milissa Ormiston

Tune in today as Lance, Rob and Adrian are joined by Milissa Ormiston to discuss the basics to 1031 Exchanges.

Links & Resources Mentioned:

ROI Disclosures: https://tinyurl.com/48xfx2wu

Adrian Schermer @ Directors Mortgage: https://www.directorsmortgage.com/loan-officer/adrian-schermer

Rob Delavan @ Delavan Realty: https://delavan-realty.com

Lance Johnson @ ROI Financial: https://roi-fa.com

Milissa Ormiston: https://www.ipx1031.com/locations/name/milissa-ormiston/

Events: https://roi-fa.com/events

Transcript

Adrian Schermer (00:03.062)
Hello future millionaires and welcome back to the get rich slow podcast. We are your hosts Rob Delevan, Lance Johnson, and I am Adrian Schermer

Rob Delavan (00:09.193)
Good morning.

Lance J. Johnson (00:12.1)
Hello there.

Adrian Schermer (00:15.366)
On today's episode, we are going to be exploring some new topics with our guest, Milissa Ormiston. Milissa, hi, how are you doing this morning?

Milissa Ormiston (00:24.495)
Good morning. I'm doing well. Thanks, Adrian. Just trying to stay dry in this drizzly Oregon morning.

Lance J. Johnson (00:31.768)
Summer is over.

Adrian Schermer (00:31.844)
Yeah, it feels like home again. Yeah.

Milissa Ormiston (00:33.716)
Yeah, officially I think so.

Lance J. Johnson (00:38.976)
It's funny because usually I always go to Cabo at this time to extend my summers and I didn't this year. And so yes, the rain is here early.

Adrian Schermer (00:39.126)
You can catch us online. Oh, go ahead.

Rob Delavan (00:48.926)
Hmm.

Milissa Ormiston (00:51.215)
Is it your fault then, Lance? I said, is it your fault that we now have rain? Yeah. Okay.

Adrian Schermer (00:51.298)
That last little bit.

Rob Delavan (00:51.476)
You're in.

Lance J. Johnson (00:53.444)
Excuse me.

Lance J. Johnson (00:56.932)
I think so. I think you could probably blame me.

Adrian Schermer (01:00.214)
Sounds good. You can catch us online, Apple podcasts, Spotify, Audible, Amazon Music, YouTube, if you'd like to see the video that accompanies this presentation along with some visuals and on Stitcher as well. In today's podcast, this is a precursor to our one hour tax seminar that we're holding live on the 19th of November. As a prep for this seminar, we're gonna cover a few of the basics within 1031 exchanges.

We're defining and mapping out what a 1031 exchange is, including the qualifications, timeframes, address, address vacation home requirements and explore primary residence and combining residence exemption with 1031.

Adrian Schermer (01:46.102)
And let's start things off with a success story about this topic. Milissa, it sounded like you had something for us.

Milissa Ormiston (01:52.699)
Well, yeah, Rob was asking me, you know, did we have any of those last minute oo-oos and just had one a couple of weeks ago. Hate to see this type of thing. You know, the phone call I always hate to hear is I sold my property because that means it's too late, guys, if you sold your property and you don't have your exchange in place. So I was boarding a flight from Seattle to Portland. So just like a little quick flight here and

late afternoon and a gentleman reached out to me to say, hey, my property is supposed to be closing today. I wanted to do an exchange. Well, that's not exactly something we like to hear. And so I asked him if the property had funded and recorded and he said, well, it was supposed to. And I said, well, it was late enough in the afternoon that I thought that was maybe a possibility that hadn't happened. So I said, well, if it hasn't funded and recorded, we can make it happen.

Rob Delavan (02:32.656)
Mm-mm.

Milissa Ormiston (02:50.491)
I got me some information, reached out to escrow as it turns out, fortunately for the seller, the buyer's funds had not shown up to escrow that day. And so we were able to, he was very lucky, had escrow send those things to one of my exchange officers as I'm getting into my seat, I'm calling an exchange officer saying, Hey, you're doing a last minute exchange. There's an email. Here's some information. Get this set up.

Adrian Schermer (03:00.566)
Lucky. Hey.

Milissa Ormiston (03:18.899)
Once I landed in Portland back on the phone and my port exchange officer is like, well, I have everything, but there's a seller carry note, which, you know, is a little bit of a challenge with doing a 1031 exchange, which is definitely something we'll talk about more on the 19th is how do you work with a seller carried and a 1031 exchange? Um, cause we're trying to get creative out there right now with interest rates and everything.

We were able to work our way through that and successfully close the following day when the buyer's money showed up. So it was definitely a win for the guy and for us. So and my team being that pretty much most of the time I was on a plane. So I was glad we made it happen for him.

Rob Delavan (03:53.469)
Wow.

Adrian Schermer (04:02.71)
Ha ha

Rob Delavan (04:02.841)
Wow. Moral of the story. You guys are incredible. Also moral of the story. Don't wait till the last minute. Don't put you guys through that.

Milissa Ormiston (04:11.547)
No, and escrow had been telling the guy for a couple of weeks he needed to reach out and he literally did it the day it was supposed to have happened. Don't put yourself through that stress. Yeah, exactly.

Rob Delavan (04:15.454)
No cheers.

Rob Delavan (04:21.705)
No, it's not worth it. Plan ahead, right? Kind of a theme of our entire podcast for the last three years. Awesome. Well, good job. And I, and I'm sure we'll, we'll dig into some more of that, uh, in our event, which, uh, I want to actually talk about our upcoming events. Um, you can go to roi-fa.com/events

Adrian Schermer (04:28.024)
Hahaha.

Milissa Ormiston (04:28.733)
I'm sorry.

Adrian Schermer (04:30.722)
There is a trend.

Rob Delavan (04:48.053)
Um, and this particular podcast is for our next prequel to our next seminar, uh, which is, um, rentals and 1031 exchanges 7 PM. And that is on October 19th. Um, I will say our next one is November 16th and it's on IRAs, pension, social security, qualified versus non-qualified. Um, don't miss that one, especially as we start getting into end of year tax season, um, and financial planning season.

So that's also at 7 p.m. And we invite you to bring a friend and RSVP, and we want to make sure that we have enough room in our space. Lastly, also on the events page, we do have Santa is coming a little bit early this year to the ROI Delavan office over here in Boones Ferry. The event is happening Saturday, November 11th. He was nice enough to

Adrian Schermer (05:35.101)
Santa!

Rob Delavan (05:45.869)
RSVP for a couple hours, one to 3 PM. Uh, we will be hosting Santa. Uh, it will actually be just outdoors in a heated tent. So that this year we will not only host families, kids, but also the fur kids, um, and so forth. So, uh, that was a big request last year is people want, um, photos for their Christmas cards and they want them with their fur babies and their kids. So, um, we listened to the feedback.

Milissa Ormiston (06:12.751)
That's awesome.

Adrian Schermer (06:14.582)
Those people are weird, man, and I'm one of them.

Rob Delavan (06:14.673)
Um, so yeah, so definitely looking forward to that. It's, it's going to be fun. Um, the, so I want to jump straight in. Uh, we already got a little bit of a recap of what's going to happen here. So, uh, the first question, Milissa, uh, is what are 1031 basics? Uh, and this is very high level. Um, we could go on forever, but that's what the, uh, seminars for is to really deep, uh, deep dive into it, uh, 1031 basics.

Milissa Ormiston (06:17.959)
I'm sorry.

Rob Delavan (06:43.025)
basics defined along with type, timeframes, and then how do we qualify for.

Milissa Ormiston (06:47.835)
So a couple of things to keep in mind is a 1031, when we're talking about that, we're referring to the section in the IRC tax code. And what this refers to is where an investor can sell an investment real estate property, purchase a replacement investment property, and be able to defer the taxes on the sale of the relinquished property. So this is a way for people to defer the taxes.

Preserve that equity and cash available to go into the replacement property so you can buy more investment real estate. It is for those properties that are such as rentals, use of for my business or trade. This is not for flips or new construction. They do not qualify for a 1031 exchange. Timing is, as we just talked about, you need to open up the exchange before you close.

That is super key. Like I said, I hate that phone call when they call me up and say, I sold my property. It's like, does that mean you have an accepted offer or transfer of ownership has happened? That's a key element. That's the do or die deadline. Timeframes, really tight, Rob. You only have 45 days from the point of closing to either close on that new property or identify what it is you're going to buy and...

Rob Delavan (07:57.501)
Mm-hmm.

Milissa Ormiston (08:10.743)
Identification's a really important deadline that people kind of brush over and go, I need to identify, but I have 180 days to complete the exchange. They wanna jump right to that 180 days, which yes, indeed, I have 180 days to complete the exchange, but when I look at the way real estate really works, most people are never gonna go out 180 days to complete the exchange because...

Rob Delavan (08:34.773)
Mm-hmm.

Milissa Ormiston (08:35.855)
Um, typical close of escrow on a transaction is 30, maybe 45 days. So the only time I ever have a client go out 180 days is if it's a big commercial client that's always buying and selling real estate and they have a portfolio of projects that they're looking at buying or new construction. Otherwise, most people are going to close in that first 45 day window or maybe 60 to 75 days, because when I get to that ID.

Rob Delavan (09:05.904)
Mm-hmm.

Milissa Ormiston (09:06.671)
Deadline within the exchange, it is super critical and I can never feel like I can stress that enough to people because whatever is identified on day 45 and I'm limited to how much I can identify, I can only buy one of those properties and it's a pretty serious deadline.

Rob Delavan (09:21.756)
Mm-hmm.

And by identify, you basically have to in writing commit to, hey, there's these three properties that are potential candidates for me to replace my sale with.

Milissa Ormiston (09:39.651)
So that's exactly what people want to say Rob is potential. Here's where I want you to think of it. You're right. I have to, it's a physical step that they take on day 45, which is completely separate than me buying real estate. So we have to kind of keep in mind, there's two things really going on. There's the real estate portion and then the exchange portion. And the exchange is a truly arbitrary date and deadline within the exchange.

Rob Delavan (09:44.174)
Right.

Adrian Schermer (09:45.432)
Ha ha ha.

Milissa Ormiston (10:07.951)
Um, that I have to basically, it's like the IRS drew a line in the sand and said, okay, Rob, now you got to tell me what you're going to buy. You're limited to what you can identify, and then you can only buy one of those. So the way I always want people to think about it is you have something under contract that you intend to purchase. You're going to identify that particular property. And then if you choose to, you can identify additional properties as backups.

And like you mentioned, the most commonly used rule is the three property rule. So I can identify up to three properties, but keep in mind, I can only buy one of those properties. If I don't have it under contract, I have zero ability to know at that point, if the seller is going to sell to me or if I can come to an agreement with the seller. This isn't, you know, oh, well, that didn't work. I'll try again. It's a deadline.

Rob Delavan (10:34.046)
Mm-hmm.

Rob Delavan (10:37.894)
Right.

Rob Delavan (10:51.965)
Right.

Rob Delavan (10:55.857)
Yeah. And that's a, that's.

Lance J. Johnson (10:58.864)
And sometimes there's issues that arise where, you know, you think you have one type of rental or property and one of the three you identify may not qualify as a same like exchange or?

Milissa Ormiston (11:13.455)
Not so much that Lance. A lot of times people are confused by the like-kind requirement as long as my I'm selling real estate and buying real estate because that's what we're talking about in a 1031 exchange and but my intention for both what I'm selling and purchasing is for investment purposes or use in business or trade I meet the like-kind requirement so I can go from

vacant land to improve property or single family to multifamily, multifamily to commercial. I can also go short term or long term to short term. So it's the intent that's the key element to meeting the like kind requirement. And that's definitely a conversation I'm going to have with somebody upfront. So if they come to me, Lance and say, Hey, you know, I'm buying this, I'm selling this rental property, but I want to buy a primary residence. Well, I'm going to tell them upfront. That doesn't qualify.

Rob Delavan (12:05.034)
Mm-hmm.

Milissa Ormiston (12:05.695)
or I want to flip a property. We're going to let them know that doesn't qualify. So that's part of the initial conversation. And that's why people don't want me to be calling me the day they're closing because I want to make sure they understand what qualifies and what doesn't qualify.

Lance J. Johnson (12:20.72)
I think in our world, one of the questions that normally comes up is, hey, I wanna sell it, I'll just use an example of a client. I wanna retire in Oregon. I wanna, for a number of different reasons. And so I have a rental place and I'll just make up something, Sunriver I wanna rental place on the East Coast, but then eventually I may live in it. How long do they have to rent that property?

Milissa Ormiston (12:31.611)
Sure.

Lance J. Johnson (12:49.06)
to qualify and then retire in it. What is, I've heard one year, I've heard two years, I've.

Milissa Ormiston (12:56.943)
Sure. And of course, we're always going to say, talk to your tax advisor, but to preserve the safe harbor intent. Okay, Lance, that's what we're trying to do with this particular situation is to preserve that my intention was that property was intended for investment purposes when I exchanged into it. They're going to want to wait a full 24 months before they move into that property.

Again, that is to preserve the safe harbor intention of that exchange. Now there's another key element to that is if I converted out of investment status after I've exchanged into it, the other key element is I need to hold that property for a minimum of five years before I sell it. I've had several, I've had this happen with several clients this year where they wanted to sell that.

property before five years were up and they had converted it out of investment status and working with a couple CPAs on that, that would be a bad thing because what that means is I'm going to get hit with all my taxes I deferred on my previous transaction and on the sale of this property if I sell it before five years are up. There's definitely some key elements to the process as far as converting from

Adrian Schermer (14:05.698)
Mm.

Rob Delavan (14:06.076)
We love you.

Milissa Ormiston (14:15.563)
investment to primary that I want to know and understand because, you know, as we well know, Lance, people do things and then they find out they did it wrong after the.

Lance J. Johnson (14:29.216)
Well, I just think it's interesting. You got the 45 day and a hundred-eighty which are very important hurdles. But then it's the afterwards where you're not involved. And then they go on and about their daily life and, you know, oh, by the way.

Rob Delavan (14:29.492)
Hehehe

Milissa Ormiston (14:34.567)
Thanks.

Milissa Ormiston (14:44.551)
Yeah, well, you know, if they if they bring up that's what their intention is, I'm definitely going to have that conversation with them so that I make sure that they understand, hey, to preserve your safe harbor intention, you want to wait two years before you move in. The other thing the IRS wants to see you do is make sure that you own it for at least a five year period before you sell the property. If I've exchanged into that property and converted out of investment status. And I explain why and.

Rob Delavan (15:11.8)
Mm-hmm.

Milissa Ormiston (15:13.511)
kind of the math of what happens because that's going to jump right into the other tax code that kind of parallels the 1031 and that's the 121 tax code which is for our primary residence and the way that tax code reads and by the way there's a lot of misconception on how that tax code reads as well which is I must own and live in the home as my primary residence for a minimum of two of the last five years.

And that actually provides me with an exclusion of gain versus a deferral. So I get to get rid of gain of two fifty as an individual five hundred as a couple. Now, it used to be prior to 2008 that I could just move into my investment property and get that exclusion of gain. Guess what? The IRS realized they had a loophole and they changed that. So it is now a proration of that exclusion based on how many years of ownership.

To time and qualified use as a primary home. So they don't get 100% of that 250 or 500 exclusion if it was an investment property first that was then converted into a primary residence.

Rob Delavan (16:22.197)
Hmm. So you start, you start to get into some jujitsu there. Um, and probably some, some depth that, uh, yeah, we definitely can't cover today, um, uh, Melissa, you did have a basic, like a, a fourplex example of that. Um, can you just tease us?

Lance J. Johnson (16:22.804)
Yeah, there you go. All right, that's good stuff.

Milissa Ormiston (16:24.392)
Thank you.

Milissa Ormiston (16:28.832)
Hahaha!

Milissa Ormiston (16:34.73)
No, no, not at all.

Adrian Schermer (16:41.997)
Yeah.

Milissa Ormiston (16:42.755)
So this is a mixed use exchange, right? A little bit different. Yep. So there's kind of a multitude of ways that the 121 and the 1031 can be combined. One is converting from investment to primary. Another which I know we'll talk about next week is the in primary to investment.

Um, and then the other one is what we would refer to as a mixed use exchange, which is primary and investment property. Um, we'll, there's a couple, I typically like to use a duplex, honestly, even though I have in my, my presentation, a fourplex, just because a duplex is such a great visual for everybody, because we can visualize in a 50-50 kind of environment, right?

Rob Delavan (17:25.018)
Oh, OK.

Milissa Ormiston (17:35.691)
So if we say that we have a duplex and I live in one half of it and I rent out the other half and both sides are identical, as long as I meet the two in the last five years, the portion I live in would qualify under the 121 exclusion of gain of 250 or 500. And the other half of my property then would qualify for a 1031 exchange for me to defer the capital gains on that portion. So what would happen is

Rob Delavan (17:54.325)
Mm-hmm.

Milissa Ormiston (18:05.079)
50% of the proceeds at the end of the transaction would come to me for my portion that I live in and then 50% of the proceeds would go to the exchange account to do the 1031 exchange and then half of that value would be my replacement value on the new property. So again, easy math, I'm selling a million dollar duplex. I now need to buy a $500,000 replacement property.

50% of the proceeds after all my closing costs would need to go into the new property. And that's how a mixed use exchange, it doesn't have to be that pretty. They can be really convoluted, but that's just a great visual of how a mixed use exchange works.

Rob Delavan (18:48.533)
So, fellas and audience, are your wheels turning yet?

Lance J. Johnson (18:53.772)
Well, that's what makes 1031 so exciting. And why, honestly, you have a job because there's all these rules that allow you to take advantage of tax stuff. And then there's all these different, you know, you got short-term rentals, long-term rentals, commercial property. You can mix use them. That's, you could have multiple properties. There's regular 1031. There's reverse 1031. And so those are.

Adrian Schermer (18:54.262)
my game.

Milissa Ormiston (18:58.983)
I'm sorry.

Lance J. Johnson (19:22.872)
Those are all, you know, you start to add up all these combinations of things. And what you get is kind of a good seminar that talks about, Hey, make sure you have somebody just kind of overlooking your, your shoulder, making sure you're dotting your eyes, crossing your T's you're going through all the steps. Make sure you have a professional tax person to help you when the 1031 is not in your sites anymore, before you go selling property, moving into property and things like that.

Rob Delavan (19:47.103)
Mm-hmm.

Lance J. Johnson (19:52.46)
And people, you know, then there's, there's federal rules and state rules, right? And so you gotta know. So if I'm starting with a couple of properties in Washington and Oregon, and then you move, you move them all into one place and I'll call it Delaware, where there's no state taxes or Florida for income tax. You just, you just kind of know all the rules and it can be, get complex and fun. I mean, that's actually the sexy part of.

the real estate side and the financial and the tax side of things.

Rob Delavan (20:21.205)
I'm going to go to bed.

Milissa Ormiston (20:22.59)
Thank you.

I don't know, Lance, that people think 1031 exchange taxes is sexy, but I would agree with you. I think it is actually.

Lance J. Johnson (20:31.448)
Confusing and then therefore, you know, it's like a love hate relationship. So it's sexy on one hand and, and not so sexy on the other end.

Adrian Schermer (20:32.656)
I do. Yeah.

Preparation is sexy.

Milissa Ormiston (20:40.599)
Exactly. Well, you know, I agree with you 100% because they're the basics, right? 45 days, 180 days, what a fully tax-deferred exchange looks like, identification, what qualifies for like kind. Those are the basics. And that's the part that's probably the easy part that people can maybe read up on their own. And then there's all the little nuances that...

You really do need to talk to somebody to make sure you understand what you need to be doing, which makes it fun on my part because it is a little bit like a puzzle, right? There's some people have this puzzle they're trying to put together, and sometimes they're trying to stuff the pieces together not quite right. And my job is to kind of help them move those pieces around so they fit together correctly.

Rob Delavan (21:32.157)
Yeah. Well, this is, this is going to be fun. I want to leave it there. Let's, let's, let's leave some room to explore here. So, I mean, it's obviously a powerful tool. We're going to, to defer taxes, right? We've got to use the right words within our real estate and investment endeavors. It's also obviously confusing, misunderstood, and all of these assumptions are made. So, we are hosting.

Uh, Milissa of IPX exchange, uh, and Jan of James Keep & Company and Lance Johnson with ROI financial, um, as an expert panel on the 19th of October, uh, 7 PM. I will be the MC and, uh, we're just looking forward to unpacking and, uh, this topic more, uh, and also just opening up questions from the audience. That's where it really gets interesting. We've had some, uh,

Adrian Schermer (22:06.003)
Mm-hmm.

Rob Delavan (22:28.145)
Some cool stuff happened and we have podcasts in the past that we've released with Milissa, Milissa and Lance. You guys really started playing with those puzzle pieces on some, uh, so it kind of geeking out on this, which, uh, we'll have a lot.

Milissa Ormiston (22:35.239)
Yes.

Lance J. Johnson (22:39.188)
Well, I mean, I see this. I see this, the first one is just being an introduction to clients and what you get into really quickly is all these like just scenarios. You know, it's like, I just got back from a hockey tournament with my kids and it's just many different dynamics that happens. And it's like watching a hockey game. Sometimes it ends up in a fight. Sometimes it's a great game. It's just, it's just very interesting. And

Rob Delavan (22:51.828)
Yes.

Milissa Ormiston (23:02.407)
I'm sorry.

Adrian Schermer (23:03.801)
Hahaha!

Lance J. Johnson (23:07.552)
And like I said, to me is, you know, anytime we can educate our clients, add value to their situation, explore options for them, because sometimes it's, you know, sometimes commercial is the better way to go. Sometimes it's vacation rentals, sometimes it's long-term rentals. Sometimes it's not in the state you wanna live in if your long-term goals is to retire somewhere else, you know, so I think that's the fun part of the planning is really helping them think out.

Rob Delavan (23:14.953)
Now.

Lance J. Johnson (23:35.984)
Estate taxes, income taxes, real estate, you know, exclusions, you name it. So it's fun.

Rob Delavan (23:41.905)
Right. Um, so RSVP, uh, www.roi-fa.com/events Um, we invite you to bring a friend seven to 8 PM on the 19th. That is a Thursday of October. Uh, you guys will be glad you did. You'll get to experience the full hockey 1031 exchange analogy.

Adrian Schermer (24:02.262)
Hahaha!

Lance J. Johnson (24:02.936)
Yes, yes, you know I was going to bring it in at some point in time.

Milissa Ormiston (24:05.223)
This looks like a half-gate, but it's already on the page.

Rob Delavan (24:07.825)
There you go. You've never you've never experienced that before right Milissa, even though you've talked about this a thousand times our websites are again roi-fa.com , delavan-realty.com directorsmortgage.com and We'll have links on our PowerPoint here. Also, you can reach out to Milissa at IPX1031.com/ormiston

Milissa Ormiston (24:13.461)
I'm looking forward to it.

Rob Delavan (24:35.605)
And appreciate everybody for listening and looking forward to this event.

Milissa Ormiston (24:47.835)
Thanks for having me.

Rob Delavan (24:49.257)
Thanks guys.

Adrian Schermer (24:50.21)
Thanks everyone. We'll catch you next time on the Get Rich Slow podcast.

Lance J. Johnson (24:50.253)
Thank you.

Rob Delavan (24:53.578)
Bye bye.