What Real Estate Agents Need to
 Know About Section 1031 Tax-Deferred Exchanges
 

It's clear that Section 1031 tax-deferred exchanges provide real estate agents a tremendous opportunity to increase commissions. But more importantly, you are serving your client's best interest when you are able to recognize an opportunity for a tax-deferred exchange. Think about it. What's better for your client? Paying taxes, or being able to put more money into a property by deferring those taxes? Help your clients grow their investments, not their tax bills!

Here are a few questions that we are commonly asked by real estate agents:

Q: WHOM SHOULD I CONTACT TO SET UP AN EXCHANGE?

A: As you might expect, we strongly suggest that you call Edmund & Wheeler, Inc. at 603-444-0020. We can act as the intermediary for your exchange anywhere in the United States.

Q: WHEN SHOULD I CALL EDMUND & WHEELER, INC.?

A: Contact us as soon as you recognize that your transaction might be a candidate for an exchange. We will be happy to consult with you and your client to determine whether the client's situation warrants an exchange, and we'll be straight with you if it doesn't. For a complicated transaction, consultation may involve the client's legal and/or tax adviser(s). We are not attorneys or accountants, and as an intermediary we are specifically restricted from providing legal or tax advice. We always suggest that the client discuss his or her plans with his trusted advisers to make the final determination regarding an exchange. Our fee only applies when an Exchange Agreement is executed, so take advantage of our consultation offer. The bottom line answer to the question is to involve us as early in the transaction as possible.

Q: WHAT CONTRACT LANGUAGE SHOULD BE ADDED TO THE PURCHASE AGREEMENT?

A: You can add the language below to your Purchase Agreement, which will notify the buyer of the seller's intention to perform a tax-deferred exchange. It also makes it clear that the other party will incur no additional cost or liability as a result of his or her cooperation. A clause such as this is not required for a tax-deferred exchange, but it is usually better to keep all parties informed from the outset.

“It is the intention of the Seller to transfer the above-listed property pursuant to Internal Revenue Code Section 1031, which sets forth the requirements for tax-deferred real estate exchanges. Seller’s rights and obligations under this and future agreements will be assigned to Edmund & Wheeler, Inc., Qualified Intermediary, for the purpose of completing an exchange. Buyer of the above-listed property agrees to cooperate with Seller and Edmund & Wheeler in a manner necessary to enable Seller to complete said exchange. Such cooperation shall be at no additional cost or liability to Buyer.”

When your client is ready to purchase his or her replacement property (the new property), the same language can be added to that Purchase Agreement, substituting "Buyer" for "Seller" and "Seller" for "Buyer." In this case, your client may wish to add the clause after the initial terms of the deal have been established. Some buyers feel that by disclosing the fact that the transaction is part of a Section 1031 exchange, it may provide the seller reason to negotiate more firmly, thinking that your buyer may be in a position of needing to buy the property in order to complete his exchange.

Q: WHAT TYPES OF SITUATIONS ARE SUITABLE FOR A §1031 EXCHANGE?

A: Every time you list any property that may have been “held for investment” (e.g., rental house, second or vacation home [there are specific restrictions on this type of property, however], duplex, office building, commercial building, apartment building, raw land, etc.), or has been used in the pursuit of a business or a trade (e.g., auto body shop, office condo, etc.) recommend that your client talk to his or her legal and/or tax advisers about the benefits of a Section 1031 exchange. You can also call us for a consultation, with or without your client. Call us if you'd like to run the situation past us to see whether it's a possible candidate.

As a licensed professional, a real estate agent cannot afford to say, “I don’t know about exchanges because I specialize in residential.” Remember, you are working in your client's best interest by raising the possibility of an exchange.

When talking with your client’s we have found it very beneficial to ask the question “What else have you got?” Often clients don’t understand the power of leveraging other real estate holdings when they are contemplating a real estate transaction.

You would be amazed at the number savvy real estate investors we have encountered that are not familiar with Section 1031. Simply stated, exchanges are a perfect way to help the investor to ramp up to larger and larger holdings using the funds he would have paid in capital gains.  This amazing vehicle is like an interest-free loan from the Government, that does not have to be repaid (until you sell in a taxable transaction)!  Have you ever heard of better terms?

Q: CAN A SECTION 1031 TAX-DEFERRED EXCHANGE BE SET UP AT THE LAST MINUTE?

A: Yes. As long as the transaction has not closed, Edmund & Wheeler can successfully convert a sale into an exchange. Documents can be prepared and delivered to the title company within a short period of time if necessary. Obviously, it's to everyone's benefit to have more time to consider the situation, but we can act on short notice if need be. However, once the closing has occurred, even if the seller has not deposited the proceeds check, it's too late:  the tax has been triggered..

Remember, it will not hurt anything to investigate the possibility of structuring an exchange. Further, how will your client feel about you if s/he does not know about exchanging, but finds out after the sale closes? As a real estate professional, you owe it to your clients to recognize the viability of exchanging. Conversely, you can be a hero and create a client for life if you bring it up and s/he happens to be hearing about it for the first time, or hadn't thought of it relative to this particular transaction.

Q: I WOULD LIKE TO KNOW MORE ABOUT TAX-FREE EXCHANGES SO THAT I CAN BETTER SERVE MY CLIENTS, WHAT OPTIONS ARE AVAILABLE?

A: We’re glad you asked. The amount of information available on the Internet is so staggering, its almost overwhelming.  Our Website is one of the better sites when it comes to education, however, we highly suggest making arrangements with Edmund & Wheeler to deliver their presentation “Section 1031 Strategies For Real Estate Agents”. This informative hour-long presentation covers exchange basics with a special emphasis on how you can use this strategy to better serve your clients. We also offer other courses, some of which you can earn continuing education credits. Call our offices to find out more, or to schedule your session.

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