“Are you familiar with a 1031 exchange?” is a question that more taxpayers wish their Realtors would ask them when they are considering the sale of a property not held as their primary residence. Is it the Realtor’s responsibility to ask? Not necessarily; however, the Realtor is one, in addition to the taxpayer’s CPA, to be in a unique position to suggest that the taxpayer add a 1031 exchange to their list of topics to consider.
Horror Story
As a Qualified Intermediary of 1031 exchanges, I am still asked whether the taxpayer can initiate a 1031 exchange after having closed on either their relinquished or old property or their replacement property. The answer is no, unless they can unwind the transaction. The other party to the transaction does not have an incentive to help and if a lender is involved, the probability of unwinding a transaction is extremely low. “If only the taxpayer was asked whether a 1031 exchange makes sense.” It would have more than likely avoided the horror story and gnashing of teeth.
Realtor’s Remorse
There are so many details to a real estate transaction, let alone securing the opportunity to list or write an offer. Some people are fickle, so the Realtor may be hesitant to suggest something they may not really understand or be in a position where they do not appear to be confident. Conversely, those Realtors who do understand enough about a 1031 exchange and when to suggest distinguish themselves from their competition, substantiating the value and experience referrals expect.
What Realtors Should Know About a 1031 Exchange
When any real property, with the exception of a primary residence is being sold, a 1031 exchange should be considered. What is not eligible for 1031 consideration includes a principal residence, indebtedness, inventory, stocks and bonds and partnership interests.
Real property can be exchanged for any real property. The Internal Revenue Code states that “no gain or loss shall be recognized on the exchange of property held for productive use in trade or business, or for investment, if such property is exchanged solely for property of like kind which is to be held for productive use in trade or business or for investment.” A single family residential investment property can be exchanged for a vacation condominium. Land can be exchanged for a commercial property.
A 1031 exchange defers the federal and state capital gain and depreciation recapture that in some states represents over thirty percent of the relinquished property sales price. Imagine rather than paying the tax, those dollars can be used towards the replacement property purchase. The tax deferral is due when the replacement property is sold or deferred again in another 1031 exchange. There is no limit to the number of 1031 exchanges a taxpayer can use.
An investment property can always be converted to a primary residence. The American Jobs Act of 2004 requires that an investment property be held for two years prior to converting to a primary residence. Once the property is held for a total of five years with two of the three as a principal residence, the sale qualifies for Section 121 $250,000 ($500,000 if filing jointly) exclusion on those years held as a primary residence.
Realtors should be familiar with a couple of Qualified Intermediaries to recommend to their clients. Take the monkey off the Realtor’s back and have the Qualified Intermediary respond to the taxpayer’s questions. It is really that simple. I work with many, many realtors who routinely refer Atlas 1031 Exchange. Read our client testimonials on a varity of real and personal property 1031 exchanges.
Learn more about 1031 exchanges by clicking on the button below to receive “Ten Reasons Why a 1031 Exchange Makes Sense.”
