Insider Secrets Podcast Season 2, Episode 6

 Guest: Michelle Fitzpatrick

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Guest Bio:

Michelle Fitzpatrick - Episode graphic

1031 Exchange Relationship Manager, VP
Michele Fitzpatrick brings 16 years of banking knowledge and almost 18 years working as a real estate professional to her role as the Vice President of Northern 1031 Exchange. On the Northern Bank team since 2014, Michele has played an integral role in the growth and inception of this wholly-owned subsidiary.

In 2001, Michele earned her Massachusetts Real Estate license and began working for Coldwell Banker, where she focused on buying and selling her own investment properties. With a portfolio of multi-family and vacation rentals, Michele was able to leverage her assets by utilizing 1031 exchange. As the Massachusetts real estate market climbed to record levels in 2003, she shifted her focus to banking and finance, working with Sovereign through the merger of Santander and onto Stoneham Bank, where she worked in both Retail and Cash Management.

SHOWNOTES

Key Takeaways

1031 exchanges can help preserve profits and accelerate wealth building.

Honesty and clear communication are essential in business and personal relationships.

Real estate can be a powerful investment tool, allowing for property growth and financial leverage.

As a bank-owned qualified intermediary, Northern 1031 Exchange provides a sense of security and safety.

1031 exchanges defer taxes but do not eliminate them, with the ultimate goal being a stepped-up basis for heirs upon inheritance.

Diversifying investments in different types of real estate can be more beneficial than cashing out and paying taxes.

Primary residences and personal property are excluded from 1031 exchanges but may qualify for tax exemptions.

The IRS recaptures depreciation taken at 25%, making a 1031 exchange a more favorable option to defer taxes.

Standout Quotes

“The tagline for 1031 exchange is to preserve your profits and help build your wealth faster” – Michelle

“I don’t like wasting my time. I don’t like wasting other people’s time.” – Michelle

“So Northern 1031 Exchange is a qualified intermediary, and when you do a 1031 exchange, the IRS requires that you have a qualified intermediary facilitating the exchange for you.” – Michelle

“There are so many different types of real estate that you can invest in, that are gonna actually serve your purpose.” – Michelle

“Where it’s hard is that you only have 45 days to identify a replacement property. So from the time that you sell your relinquish property to the time that you have to identify a replacement property is only 45 days, that’s hard.” – Michelle

“We can’t use the money for anything other than a purchase of a replacement property. The only time we’ll ever disperse the funds is if they purchase a replacement property or their exchange fails.” – Michelle

“The only time that you can extend beyond the 180 days outside of a safe harbor is if the IRS has issued some sort of natural disaster or something like that.” – Michelle

Timeline

[00:45] Intro to Podcast

[03:00] Intro to episode guest

[04:17] One word that describes Michelle personally and professionally.

[05:30] How about a little background on yourself?

[08:12] You got your real estate license to do your own transactions. Did you sell any real estate?

[11:43] Michelle explains the terminology of qualified intermediary.

[23:32] Do we know how much money goes through this process? How big is the Exchange industry?

[26:38] You used the word 1031 Exchange, is that the only type of exchange out there or is exchange used for in any other terminology?

[30:00] Can someone 1031 exchange into a syndication?

[36:14] Best book you’ve ever read?

Contact 

Email: mfitzpatrick@nbtc.com

Phone: 7815691852

TRANSCRIPT

Kristen: [00:00:00] Welcome to this edition of Insider Secrets, the weekly podcast that turns real estate investing goals into reality. Each show we interview guests who are seasoned real estate professionals, actively closing and managing real estate deals. Mike is the founder of My Core Intentions and would like to help you make your real estate investing dreams a reality.

Mike coaches you to buy investment real estate, creating short-term cash flow and long-term wealth. Your host and real estate coach, Mike Morawski, has more than 30 years of real estate investing and property management experience. Here’s your host, Mike.

Mike Morawski: Hey, what’s up everybody? Good morning. Glad that you’re here this morning and I am excited about today’s guest. We’re gonna talk about 10 31, 10 31 exchange and topic that I’ve wanted to talk about for a while. It’s been a long time since I had somebody on to talk about that, so I’m looking forward to that.

But what are you doing this weekend?[00:01:00] Intentionally, what are you setting for yourself? What are you planning to do? Clean the gutters. Do some work. I always talk about our intentions, right? What do we need to do to move us along personally, grow personally, so that we grow professionally.

We’re in a volatile time right now. Is there something maybe you need to learn or go educate yourself on, something you need to get a handle on to understand the markets, understand markets maybe you invest in or where you’re headed with your investments, but whatever that is, we need to be intentional.

So whether that’s something in our personal life, something in our business life. I always tell people, I say, look, if you’re gonna start the week out with no intention, by Friday, you’re gonna end up with nothing accomplished, right? So take that time. I always take Sunday night. I spend some time, I get prepared for the week, figure out what I need to do that are top, top top things to get done and then [00:02:00] also those hard things.

What do you have in your life maybe that’s a hard ball that you need to roll up the hill. Maybe make a tough phone call. Maybe go see somebody that you need to go see. Whatever that is, be intentional about.

Hey, if you’re here for the first time, welcome to the show. Glad that you’re here. So if you’re a brand new investor, how to get in the business. How to do small multi-family all the way up to large, huge apartment complexes and put great teams together to do that.

So you’re gonna have a lot of topics, a lot of information every week. Be here and learn what you can learn. If you are new and you’re on YouTube this morning, please hit the subscribe button and follow us cuz there’s always new content every day, all day long, we bring stuff to that platform for you to learn more from. If you’re on Instagram or Facebook, like us, love us, follow us here and we’ll make sure that we bring you pretty continued content.

So my [00:03:00] guest today is Michelle Fitzpatrick. She’s with Northern 10 31 Exchange. She’s from Boston. We had a couple of little conversations about great clam chowder before the show here.

So I’m looking forward to bringing her in. Let me bring her in real quick. Hey Michelle, how you doing today?

Michelle Fitzpatrick: Hey Mike, how are you?

Mike Morawski: Good. Good. It’s early, huh?

Michelle Fitzpatrick: It is indeed. Wake up Saturday.

Mike Morawski: You have your coffee?

Michelle Fitzpatrick: Yes, I did. Ready to go.

Mike Morawski: Hey good to see you. I know that you and I have been trying to do this for a while now, and I dropped the ball and we missed calls but we’re finally here.

So I’m glad that we are able to get this done because I think this is a really important topic. And what we’re gonna talk about today is a strategy, right? An investing strategy that people can use to create wealth for themselves down the road. And that’s what I always try to help people do.

Michelle Fitzpatrick: Yeah, and 10 31 exchange, our tagline is, preserve your profits and help build your wealth [00:04:00] faster. 10 31 exchange isn’t a great tool to do exactly that.

Mike Morawski: Great. Great. Well, I’m looking forward to digging into it, but before we get there, I’ll always ask my guests in one word, what best describes you personally and professionally?

Michelle Fitzpatrick: I don’t wanna sound cliche, but I am brutally honest.

Mike Morawski: Okay.

Michelle Fitzpatrick: And that’s..

Mike Morawski: Two words by the way.

Michelle Fitzpatrick: That is two words, but brutally had to get in there because sometimes that’s not such a good thing. So the brutally honest.

Mike Morawski: Yeah. Good. What makes you brutally honest?

Michelle Fitzpatrick: I don’t like wasting my time. I don’t like wasting other people’s time. I really like to have a clear understanding and make sure that we’re both on the same page. So I don’t like beating around the bush. I really just don’t have time for it. I just don’t have time to play games with people. So I think honesty is really the best way to achieve that.

Mike Morawski: So, I [00:05:00] really think that’s really something that is powerful not only in business, in your business life, but in your personal life as well.

Michelle Fitzpatrick: Absolutely. And I feel like that’s what I wanna teach my kids. That’s what I really try to instill my kids. I’d rather them just tell me the truth than lie to me. I’d rather accept the consequences of what they’re doing than having them lie. That’s the worst part.

Mike Morawski: Yeah, for sure. Well, let’s get into it. How about little background on yourself?

Michelle Fitzpatrick: Sure.

Mike Morawski: How’d you get into 10 31 and what’s your history?

Michelle Fitzpatrick: Yeah, so I got my real estate license back in 2000, 1999, 2000, I started buying real estate myself. So I graduated from college and moved back home, saved literally $10,000 and bought my first two family house. And then I realized really quick that I was in this real estate game.

I, at 22 years old, I was able to refinance a house that I had owned for six months and pull out 40 grand, which might as well [00:06:00] have been a million to me. And then I bought another house with borrowed money. I realized really quickly how great real estate was. So I got my real estate license just honestly to buy and sell my own properties.

I did my first 10 31 exchange probably about five or six years after and realized, oh, so there’s a tool here that’s gonna help me even more, that I can buy bigger and better properties and find properties that work better for me. That cash flow better, that might be in better locations, that might have more improvements in ’em that I didn’t really wanna do or couldn’t afford to do.

So that was always my side job, I’ve been in banking now more than, I hate to say 20 years, but I’ve been in banking for more than 20 years now, and I came to Northern in 2014. In 2015, the president decided that he wanted to start an exchange division, and I was a perfect fit for [00:07:00] it. So we started the exchange division in 2015.

We were working with a lot of our clients that were buying and selling at the time franchises. So as you stated, I’m from Boston. Boston, we have a big Dunkin Donuts. Did you guys have Dunkin Donuts in?

Mike Morawski: Oh yeah. Dunkin, but yeah.

Michelle Fitzpatrick: Yeah, they are on every corner in Boston and we have a nice little niche in the bank where we do a lot of lending to Dunkin Donuts clients. So back in 2015, they were able to exchange franchises. So we did a lot of Dunkin Donut franchises in 2015, 2016.

And then when tax reform came in 2017, we weren’t able to do, the IRS took personal property out of the exchange, out of the tax code. So we were stuck with just doing real estate. So really since 2017, we’ve been doing just 10 31 exchange transactions for [00:08:00] real property. And here we are now, seven years later, and it’s been a great business for the bank. It’s been a great business for me.

Mike Morawski: Awesome. So, there’s so much I wanna unpack. I wrote a couple notes down. So you got your real estate license to do your own transactions. Did you sell any real estate?

Michelle Fitzpatrick: Yeah, so I exchanged properties and got into better properties. So I was doing exchanges and selling properties at the same time.

Mike Morawski: Got it. Do you have to be a real estate agent or broker to do the 10 31 exchanges?

Michelle Fitzpatrick: No. So I was doing it. You do not. And almost everybody is not. I was doing it just cuz I wanted to earn the commission while I was. So rather than paying commission, I was earning it.

Mike Morawski: All right. So is your job title then, are you called an intermediary?

Michelle Fitzpatrick: That’s right. So Northern 10 31 Exchange is a qualified intermediary, and when you do a 10 31 exchange, the IRS [00:09:00] requires that you have a qualified intermediary facilitating the exchange for you.

Mike Morawski: So let’s just hone in on that piece, right? This might be new for a lot of the listeners this morning, but let’s just hone in on that piece, that intermediary piece. What is the activity that you participate in the exchange?

Michelle Fitzpatrick: So we facilitate the exchange, and what that entails is we handle all the paperwork, so we make sure that the exchange is documented properly. It shows that the exchanger is meeting all the timelines that are required. And we’ll get into the timelines a little bit. Most importantly, we hold the proceeds. So the IRS says, that you cannot have constructive receipt of your funds, so you need to have an intermediary holding those proceeds.

Now, being a bank owned qualified intermediary, people definitely have a sense of security and safety utilizing somebody that’s bank owned as opposed to[00:10:00] another qualified intermediary that isn’t. So we are owned by the bank. We’re audited just like the bank is. All of the funds are under dual control. So it really does give that level of security that people want.

Mike Morawski: Remember I said we might wind up in a rabbit hole train?

Michelle Fitzpatrick: That’s a rabbit hole.

Mike Morawski: But I’m gonna jump to another one right now. So, question about Northern Trust. Northern Trust Bank. I know it’s one of the oldest banks in the country, right?

Michelle Fitzpatrick: Well, there is a northern trust. So, we’re northern bank entrust out of Boston, which is different than the larger institution.

Mike Morawski: Okay. Got it.

Michelle Fitzpatrick: We are family owned and operated bank out of Boston. We’ve been around for 65 years. And the qualified intermediary is a wholly owned subsidiary.

Mike Morawski: Got it. Okay, good. Good to know. Now, can you only do exchanges in Boston or on the east coast, or can you do nationwide exchanges?

Michelle Fitzpatrick: We can do exchanges nationwide. Last year I think we did exchanges in 38 [00:11:00] states, so we exchange everywhere. I am personally based out of Boston. We actually have a team that’s based out of North Carolina that helps facilitate our exchanges.

So when we started the exchange company in 20 2015, we hired a qualified intermediary that has been in the business for 25 years. He came with an abundance of knowledge and information and he had a team of admins that helped process the exchanges for us. So him and his team work out of North Carolina for the bank. And we all work together.

Mike Morawski: All right, so now we talked about intermediary, but now you said qualified intermediary, so now let’s talk about that terminology.

Michelle Fitzpatrick: Sure. So a qualified intermediary that’s actually what it’s called. Unfortunately, the industry’s not regulated. So anybody can hang up a shingle and become a qualified intermediary, take your deposit in and facilitate the [00:12:00] exchange. There are some states that have some sort of rules and regulations around it, but there’s no nationwide Licensing or qualifications to become a qualified intermediary.

So we always tell our clients, qualified intermediaries aren’t all created equally. So it’s important to do you due diligence. And our trade association, the Federation of Exchange Accommodator, really gives people that sort of validation. So you should become a member of that trade association.

Mike Morawski: Yeah. So, I wanna circle back to where I was. I was kinda headed somewhere with this Northern Trust question. So we all know the environment we’re in right now. There’s a lot of talk about banks being in trouble and issues going on, how does Northern Trust fair in that right now? Are you guys on a watch list or not on a watch list?

Michelle Fitzpatrick: Yeah, we are not on a watch list. We still have five stars in bank [00:13:00] rate. We are a true community bank. The majority of our investments are in loans, so in specifically in commercial loans. So we’re not going out and doing any sort of risky investments in bitcoins and crypto and things like that, our money is on the streets in our..

Mike Morawski: Hard assets.

Michelle Fitzpatrick: Yep.

Mike Morawski: Okay.

Michelle Fitzpatrick: We’ve been dealing with this for the last two weeks because every bank has seen that sort of fallout from SVB. So we do offer, we offer services in products that allow people to get FDIC insurance. 100% of their deposits, so.

Mike Morawski: Awesome. Yeah. Do you know who Dave Ramsey is?

Michelle Fitzpatrick: Oh yeah, of course.

Mike Morawski: So I heard Dave Ramsey the other day, I’m not a fan. I don’t like a lot of what he teaches or talks about. But, I heard him the other day and I said, wow. He really nailed this, but he was talking about these banks and he basically said, if you aren’t a big player in a bank, if you weren’t involved in [00:14:00] crypto or some offshoot of the Bitcoin era, if you didn’t grow in technology too fast in a short time and make a boatload of money and put it in a bank that invested in some other things, your money’s okay and not to worry about it.

That it’s those types. And he broke it down this way. He said, if you are not a player, you’re okay. It’s the bigger ones that kind of got in trouble or are in trouble.

Michelle Fitzpatrick: So I would say the big banks, I wouldn’t say players because I think that there’s a lot of small banks that do a lot of great things for their community. So, I would say that in our community in Boston, we are a player and we are putting money out on the streets every single day, so we are making a huge difference, just not on a large scale like that.

Mike Morawski: Yeah.

Michelle Fitzpatrick: I guess it’s the terminology I don’t agree with.

Mike Morawski: Yeah. It was just kind of interesting though, cause he brought it into perspective and said, Hey listen, don’t worry about your money in the bank, it’s insured. Most people don’t have [00:15:00] $250,000 in a savings account anyhow.

Michelle Fitzpatrick: Right, right.

Mike Morawski: And I’m a syndicator, so I’ve had investors come to me and say, Hey listen, what’s gonna happen with our property?

And I’ve said, what do you mean? Well, these banks are failing and there’s problems. I said, first of all, the government’s not gonna let all the banks fail. Second of all, our money, we paid to the bank because we owed money on this asset. So we’re paying. So even if the FDIC did come in and take over that bank, we would get a new servicer and just pay our money to that new servicer.

Michelle Fitzpatrick: Right. They’re not calling the loan immediately.

Mike Morawski: Yeah. It doesn’t affect us. It doesn’t affect our asset. We’re in good standing. So it falls back on us as the vendor or the customer.

Michelle Fitzpatrick: It has been, I gotta tell you though, it’s been a crazy two weeks and I went through it in banking in 2009, but this was a crazy two weeks. It happened so quickly and I was shocked by it.

Mike Morawski: Yeah. I remember 2009, it’s funny you bring that up. I remember in [00:16:00] 2009 watching the news and seeing local banks here in Chicago, the news was out there filming as the FDIC walked in and locked the doors behind them. And it was like, holy cow, this stuff is real. So I understand the concern of people, but I think a lot of times general population, the public get overly concerned about things that they just don’t have enough information about.

Michelle Fitzpatrick: It’s all the media, a lot of it’s just a big media hype. They’re getting just bits and pieces of information.

Mike Morawski: I always say that if the media would dig their teeth into everything’s okay, the whole world did change.

Michelle Fitzpatrick: Again, that’s another rabbit hole we can go right down.

Mike Morawski: Right, exactly. I see we’re on the same page on that.

Michelle Fitzpatrick: Yep.

Mike Morawski: Anyhow, so let’s talk about 10 31. Let’s talk about the process. I have a piece of real estate that I’m selling and I want to defer my taxes, right? Is basically what a 10 31 does, is it?

Michelle Fitzpatrick: That’s right.

Mike Morawski: Keeps me from being liable for [00:17:00] capital gains today. So can can you take it from there?

Michelle Fitzpatrick: Absolutely. So what people should understand is that a 10 31 exchange is only going to defer your taxes. It’s not going to eliminate them. So you’re kicking the can down the road. You’re bringing your tax basis from one property over to the next property. So, honestly, the ultimate goal would be to die with your property and then your heirs get the stepped up in basis and everybody wins. But that’s exchange until you die.

Mike Morawski: Well, Warren Buffet said, The best time to sell is never.

Michelle Fitzpatrick: What else are you gonna put your money in though? I always think it’s funny when people call me and say, oh, I’m gonna sell my property and I just want the cash. And I’m like, well, what are you gonna do with it though?

There are so many different types of real estate that you can invest in, that are gonna actually serve your purpose. I don’t understand why you would ever pay 30 to 35% in taxes and then invest whatever was left over. So I agree with Warren Buffet. [00:18:00]

Mike Morawski: Yeah. And you just said it right there. You capitalized it. You said, why would you pay the capital gains and then invest.

Michelle Fitzpatrick: Doesn’t make sense. You know, how long it’s gonna take you to make that 35% back up? So we’ll go through the taxes because I get a call, I talk to people every day and they’re like, you know what, I think I’m gonna just pay my taxes.

I’m gonna sell the property, I’m gonna pay my taxes and I’m gonna be done cuz it’s only 20% or it’s only 15%. And that’s just not the case, unfortunately. There are multiple taxes that go into your capital gains. So there’s the federal capital gains tax, which people are right. It’s either 15 or 20%.

Most people fall into the 20% range because what happens is, when you sell a property it gets that Revenue, that money gets added to your income. So you’re bumped up into that 20% range pretty quickly. Especially in Boston and I’m sure in Chicago too. Prices are very expensive. People get bumped up into 20% easily.

Mike Morawski: [00:19:00] Yeah.

Michelle Fitzpatrick: There is the Massachusetts, and I’m sure Illinois has one too, but Massachusetts has a state tax of 5%. So here we are at 20%, 25% right now. There is a tax called NIIT tax, net Investment Income Tax. It’s a federal surcharge. It’s for Medicare, and that has been probably for the last, it’s like an Obamacare Medicare tax.

[00:20:00]

Michelle Fitzpatrick: So it’s been in existence for 10 years or so, and that’s 3.8%. So now in Massachusetts we’re up to 28.5%. And we also in Massachusetts, I don’t know every state has this, but Massachusetts just put into law in January 1st, 2023, that there’s a new millionaires tax. So any dollar over a million dollars is gonna be taxed an additional 4%.

Mike Morawski: So any gains over a million or?

Michelle Fitzpatrick: Any income over a million dollars is taxed an additional 4% on top of the five.

Mike Morawski: Isn’t that amazing?

Michelle Fitzpatrick: We just [00:21:00] voted it in.

Mike Morawski: So you’re paying taxes when you earn your money. And you take your money from your job, you save it, then you pull it out, you invest it, you’re taxed on it again.

Michelle Fitzpatrick: I cannot even believe what you preached into the choir. I can’t even believe that we just voted this in. And it affects almost all of my clients. And our average exchange, I mean, we do exchanges that are 300,000. We do exchanges that are $90 million and everything in between. But so many people are selling a million dollar asset. It’s not that uncommon. Our average exchange, I think is $1.2 million and that’s just for a two family in Boston.

So we have the millionaires tax. So, some of these people here we are, we’re just inching up, inching up. Now, where the big problem is that people don’t understand is that the IRS will recapture any depreciation that was taken at 25%. So, if somebody has owned a property, they depreciated, [00:22:00] let’s just say they depreciated over 10 years, a hundred thousand dollars. The IRS has taken $25,000 of that back right away.

Mike Morawski: On the exchange or just in a normal transaction?

Michelle Fitzpatrick: On if you just sell. So by doing an exchange, you will defer all of those taxes, including the depreciation recapture. So to me, it’s a no-brainer. All of those will add up to easily 35%. And sometimes people are getting more than that. So, you sell for a profit and you sell and don’t exchange. You have 30% down right off the bat.

Mike Morawski: Okay. Nice call. Great talking to you today.

Michelle Fitzpatrick: I know it’s terrible, right? But the good news is, though, I deliver the bad news, but then I become the hero and I’m like, but I have a solution for you. I can fix this. Like we can get you into something. We can get you to exchange.

Mike Morawski: I used to tell my assistants all the time, look problem’s, fine. We’re gonna have problems, but come to me with three solutions.

Michelle Fitzpatrick: That’s what I do. This is [00:23:00] why I love my job.

Mike Morawski: Let’s go.

Michelle Fitzpatrick: Yep. This is why I love my job. I feel like everybody that works with us, they’re like, this was great. I’m so glad I didn’t know about it. I’m glad that either my attorney told me about it before or my realtor told me, or my cpa. I’m so glad that somebody told me about it cuz it really isn’t something that the average investor would know about.

Mike Morawski: Yeah. It’s kind of a hidden secret. And lemme just ask from a global stand, or not a global standpoint, but nationally, do we know how much money goes through this process on an annual basis. How big is this industry?

Michelle Fitzpatrick: Billions. Billions and billions. I mean, we are very small. We do 300 exchanges a year. There are title companies out of Chicago that do thousands and thousands of them a year.

Mike Morawski: So if I’m selling my personal residence, can I exchange into my next personal residence?

Michelle Fitzpatrick: No. So what is excluded from a 10 31 exchange is your primary [00:24:00] residence. Second homes, any personal property. So you cannot exchange your personal residence. But the good part is, the good news about that is that you get a tax exemption for your primary residence. So you can take advantage of a primary residence tax exemption for $250,000 per person, $500,000 for married people and you can take advantage of that every two years. So, you don’t have to exchange.

Mike Morawski: Okay, great.

Michelle Fitzpatrick: So in exchange is just for investment purposes in investment properties or business properties that are used for business use.

Mike Morawski: So I know there’s some variances in this. So can I exchange from a single family home into an apartment building? Can I exchange from a apartment building into a single family home? Can I go from an apartment building to a commercial building? Talk about that a little bit.

Michelle Fitzpatrick: Yeah, that is a great question. So that’s the like, kind myth is what [00:25:00] we call it.

Mike Morawski: I’m the question guy, by the way.

Michelle Fitzpatrick: I love it. And I have all the answers. Just come at me, Mike. No, that’s the like kind myth. So to sum it up, you can exchange real property for real property that is held as business for business use or investment purposes. The type of property doesn’t matter, so absolutely you can exchange a condo for an apartment building, you can exchange an industrial building for a retail shop, it doesn’t matter as long as it is real property for real property that’s used for investment or business use.

Mike Morawski: So could I an exchange from a single family rental to a houseboat?

Michelle Fitzpatrick: No, cuz a houseboat is not deeded. So a houseboat’s considered personal property. However, we have done multiple exchanges on boat slips that are deeded boat slips. As long as they’re renting those boat slips and not using them for their own yacht [00:26:00] and living in that yacht. They can absolutely do deeded. We’ve done deeded boat slips, deeded parking spots, but the houseboat is considered personal property.

Mike Morawski: Interesting. So it’s not just real estate then. There’s other things that you can exchange, right? Can you artwork or?

Michelle Fitzpatrick: Not anymore. So that was taken out of the code. So personal property was taken out of the code in 2017. So it really is just real estate. But like I said, because the parking spots and because the boat slips are deeded, those are considered real estate.

Mike Morawski: Oh, interesting. So you use the word, it’s 10 31 exchange. Is that the only type of exchange out there? Or is exchange used for in any other terminology?

Michelle Fitzpatrick: Yeah. So 10 31 that’s the IRS code, so it’s the 10 31 code and it’s called like Kind Exchange. And [00:27:00] yes, that’s all that’s available. The tax code when you said it a little earlier that you think maybe it’s like a little bit of a loophole or things that people don’t know about, but what’s kind of funny about it is that the tax code started in 1918. That was when the IRS came together and put the first taxes together.

And it was in 1921, that 10 31 became part of the code. So it was literally just three years later. So there’s been a need for it since the beginning of taxes and it’s been in the tax code now 102 years. So it’s been in the tax code as long as the tax code’s been in existence for the most part.

So it’s really not this secret or this loophole. It’s necessary for the real estate industry, it’s a necessary component. It’s what’s making real estate continue. It’s what’s making investors sell properties, other [00:28:00] investors buying properties, in renovating them, and continuing that economy and continuing that real estate to flow through cities. That’s how cities grow is through 10 31 exchange.

Mike Morawski: Yeah. Interesting. So let’s talk about the timeline. So how does it work? What are the mechanics behind it?

Michelle Fitzpatrick: So, the IRS isn’t gonna give you everything for easy. You have to work for it. So there’s nothing super easy about doing this in such a timeframe. So the IRS says, from the time that you sell your relinquished property, so from the time that you close, you go to the closing table and the proceeds come to us. You’ve deeded the title or direct deeded to your seller, your buyer. Your time starts, your clock starts ticking. So you have 180 days total from the time that you sell to the time that you have to take title to your breed, your replacement property.

Now, that’s kind of the [00:29:00] easy part of it, because 180 days and six months, you have that pretty easy. Where it’s hard is that you only have 45 days to identify a replacement property. So from the time that you sell your relinquish property to the time that you have to identify a replacement property is only 45 days, that’s hard.

Because you have to give us your qualified intermediary, a list of properties that you wanna purchase. And you have to purchase one of those properties off the list or your exchange fails. The IRS has a very specific rules and guidelines on how you can identify property.

Mike Morawski: Interesting. So Michelle, I’m a syndicator. I bring multi-family opportunities to the marketplace, raise private capital. So I bring limited partners in on that side of the business to provide the capital to buy the property, do our capital improvements, run and operate the [00:30:00] property, whatever else goes into that. Can someone 10 31 exchange into a syndication?

Michelle Fitzpatrick: They can, as long as it is classified in as a Delaware Statutory Trust, or DST. The IRS has recognized DSTs syndications as exchangeable property. And the reason they do that is because of the way that the title is held, the investors are considered like tenants in common. So they’re fractional interest shares in the property, but they’re fractional interest in the underlying property, not in like a trust.

So REITs don’t qualify because they have an interest share in the actual trust, whereas the DST, they have a fractional interest share in the underlying property.

Mike Morawski: So on that note, do I have to structure my entire deal I’m doing as a D S T? Or can I carve out a portion of that as a D [00:31:00] S T where we would take 10 31 investors into that?

Michelle Fitzpatrick: From the syndication standpoint? From like your side?

Mike Morawski: Yeah.

Michelle Fitzpatrick: That’s a good question. I’m sure you can, I don’t know the answer to that. I don’t know if you can carve out a certain portion. It depends on how you own it. I think you can, but I don’t know the answer to that. I’m sorry.

Mike Morawski: I don’t know the answer either. That’s why I asked a question.

Michelle Fitzpatrick: Like, DSTs can be multiple properties too. So you may go into a multiple property DST where there’s five properties in a portfolio and you’re buying underlying property of all of those. So there’s different ways to slice and dice it.

Mike Morawski: And I wanna ask this question, and I’m not sure how to frame it. Is there any protection for, let’s say that seller sells their property and the intermediary takes those funds from the sale of that property, they’re sitting on it. What if all of a sudden that seller gets a judgment [00:32:00] against him or has some tax implication or something like that. Is that money from that trade, from that sale protected with the intermediary, or is it open to scrutiny? I’m hoping I’m asking the question.

Michelle Fitzpatrick: Yeah. So we from an exchange standpoint, we can’t pledge the money or use the money for anything from our standpoint. We can’t use the money for anything other than a purchase of a replacement property. The only time we’ll ever disperse the funds is if they purchase a replacement property or their exchange fails. Now because we are bank owned, we personally hold those proceeds in the client’s name and tax ID number.

So the bank account is actually opened under their information. We just have control of it, so whether or not it can get [00:33:00] seized, it probably could be because it’s again, under their tax ID number. And that’s how we hold the funds. Some QIS may do it differently, but we hold them for insurance purposes, for the FDIC insurance purposes. And to making sure that those clients know that those funds are theirs, they’re segregated from all the other funds. But we wouldn’t release ’em otherwise.

Mike Morawski: You mentioned exchange fails. So let’s say that you’re 170 days, 175 days into the exchange. You’re supposed to close tomorrow, but for whatever reason, that deal’s not gonna close, and you’re not gonna meet the 180 day mark.

Michelle Fitzpatrick: That’s tragic.

Mike Morawski: That’s not what I wanted to hear, but.

Michelle Fitzpatrick: I know. The only time that you can extend beyond the 180 days outside of like a safe harbor is if the IRS has issued some sort of natural disaster [00:34:00] or something like that. So, during Covid was a great example. Hurricane Ian was another good example. They issued extensions on 10 31 exchanges. So they issued extensions on the 180 days. They issued extensions on the 45 days. So they issued extensions on those nationally declared disasters.

Mike Morawski: Wow, that’s interesting. I never knew that. So that’s interesting to understand that they can do that and they have done it.

Michelle Fitzpatrick: I think they did four of them this year. None of them fell in any of the areas that I was dealing with. Some in California, but like wildfires is another big one. Obviously the hurricanes in Florida, really big ones and up and down the east coast. I’m sure they’re gonna probably do it for the disaster area. The tornadoes in I wanna say Mississippi, but I might be wrong. But they were just tornadoes. I have a feeling they’re gonna issue disaster areas there as well. That they’ll allow extensions to happen.

So yeah. Covid, they [00:35:00] issued extensions just a blanket across the entire country. But unless there isn’t a disaster and an extension issued, you’re bound by the 180 days. If you get to the 180th day and you know something happens, the seller that you’re buying from doesn’t show up and is sick and doesn’t pass papers that day, you’re outta luck.

Mike Morawski: Oh well.

Michelle Fitzpatrick: Yeah, it’s harsh.

Mike Morawski: Interesting. Well, it’s interesting to know that there’s this process out there.

Hey, this has been great this morning. Thank you. I appreciate you taking time on the weekend to be here. How do people get ahold of you? And I have three bonus questions for you, but how do people get ahold of you if they wanna connect with you?

Michelle Fitzpatrick: Thank you. It was really nice seeing you and talking with you this morning. So easiest way to get in touch with me is my email. It’s mfitzpatrick@nbtc.com or my cell phone. My office line always rings into my cell, so it is [00:36:00] 7815691852.

Mike Morawski: Perfect. Say it again.

Michelle Fitzpatrick: 7815691852.

Mike Morawski: We’ll make sure it’s in this show notes anyhow.

Michelle Fitzpatrick: Thank you.

Mike Morawski: Hey, so three bonus questions that I ask everybody. Best book you ever read?

Michelle Fitzpatrick: Ooh, I’m gonna say the Game of Thrones series. It was the whole series. I couldn’t even tell you which book was the best. Loved them.

Mike Morawski: Okay. What’d you learn?

Michelle Fitzpatrick: That I like some dark stuff. It’s a little graphic and dark, but I couldn’t put them down.

Mike Morawski: Oh, that’s funny. Good for you.

Michelle Fitzpatrick: I should say something like Catcher in the Rye, that it give me inspiration, like I should say something like that, but I can’t. I’d like the nonsense.

Mike Morawski: That was cool though. Everybody always says Think and Grow Rich or Rich Dad, Poor Dad or..

Michelle Fitzpatrick: I wanna sit on the beach mindless. I don’t wanna think about real estate all the time.

Mike Morawski: Oh, there you go. How about Best Restaurant?[00:37:00]

Michelle Fitzpatrick: Oyster House?

Mike Morawski: Really?

Michelle Fitzpatrick: No, I’m just saying cause we said it earlier.

Mike Morawski: I’m like, wow, that’s funny.

Michelle Fitzpatrick: I do like a good steakhouse. So we have Del Frisco’s in Boston and I do like a good steakhouse. Smith and Lewinsky’s give me a good steakhouse any day.

Mike Morawski: Wow. Good for you. All right, great. Love that protein. How about best tourist attraction?

Michelle Fitzpatrick: Boston or otherwise?

Mike Morawski: Whatever you feel like.

Michelle Fitzpatrick: Okay. I’m going Boston, Fenway all the way.

Mike Morawski: Oh God.

Michelle Fitzpatrick: Come on.

Mike Morawski: I love Fenway.

Michelle Fitzpatrick: You go into Fenway. There’s something so special about Fenway, whether you’re a baseball person or not. You can’t beat Fenway.

Mike Morawski: Well, I think it’s the only park in the country that’s original. Wrigley Field has been rebuilt and modified and I don’t know what else in the country and I love baseball, but I don’t know what else in the country is not pretty much original like that.

Michelle Fitzpatrick: [00:38:00] Yeah, yeah. You can’t beat Fenway. Fenway is pretty special.

Mike Morawski: I was impressed when I went there. Hey, thanks for being here this morning. I appreciate you.

Michelle Fitzpatrick: Thanks, Mike.

Mike Morawski: And I’m gonna move you to the back room. Say goodbye if you hang out with me for a minute. That’d be great.

Michelle Fitzpatrick: Sounds good. Thanks, Mike.

Mike Morawski: All right. Standby.

Hey everybody, that was great this morning. I learned some things. I hope you learned some things. But the 10 31 exchange can be a powerful tool for you in your real estate investing journey. Whether you are doing multi-family, single family, whatever asset class you’re in makes no difference as long as you’re doing a light kind exchange, right?

And there’s some rules and some hoops you have to jump through, but the benefits are helping you accelerate that creation of wealth for yourself. Cuz you know the one thing with 10 31 is you get to use all the money and you’re not paying those taxes upfront. So if you have any questions, need anything, reach out to Michelle.

If I can answer anything for you, reach out to me. Tell [00:39:00] somebody about us this week and come and get more information, more knowledge. Grow your investing journey. Remember like us, love us on social media and follow us on YouTube. I’ll look forward to seeing everybody next week.

Kristen: Thank you Mike, and thank you for joining us for another great episode of Insider Secrets. As always, Insider Secrets is brought to you by My Core Intentions. Wherever you hang out on social media, you will find Mike and My Core Intentions. Please like and follow us to get the most up to date real estate investing trends.

Visit mycoreintentions.com where you can get expert coaching on all things real estate investing and property management. If you are looking to become an expert, Mike’s coaching will help you scale your real estate investment business. We’re looking forward to having you back again next week for more Insider Secrets.