Pennywise … 1031 Foolish

(Listen Here 5:43 min)

Assembling the Full Team of Experts is Wise to Do

This podcast is entitled Pennywise… 1031 Foolish. What I mean by that is when you are doing a 1031 Exchange, you do not want to cut corners on the professional advisers that you need to complete your exchange. You want to have your team assembled, and you want to have the full complement of professional services available. So, if a problem comes up, you can get through it.

#1 Your 1031 Exchange Qualified Intermediary Acts as an Insulator

First and foremost, when you are doing a 1031 Exchange in a delayed fashion, where you have 45 days to identify and 180 days to complete, you need to have a Qualified Intermediary. The Qualified Intermediary will act as an insulator – someone who is going to hold the proceeds so that you don’t have actual or constructive receipt of the monies. In addition, the Qualified Intermediary also can prepare the exchange agreement, the assignment agreement, and the required written notices to the parties. They can interact and make sure that the paperwork which documents the exchange is properly set up.

#2 Your Title Company or Law Firm Acts as Settlement Agent

In addition to a Qualified Intermediary, you need to have a settlement agent. Typically, in the real estate realm, closings are conducted by either a title company or a law firm. Whichever one you have, you want to use a sophisticated operation that is familiar with commercial real estate transactions - more precisely, 1031 Exchanges. Because the learning curve can be rather steep, you don’t want to have an outfit that doesn’t do what you need. You want someone who is experienced with 1031 Exchanges, so they will set up your transaction and disburse the monies correctly.

# 3 Your Real Estate Agent is Doing More
than Collecting a Big Commission

Also, if you are doing real estate, you want to have the best and the most experienced commercial real estate agent – broker involved. People in the process need to be familiar and comfortable with 1031 Exchanges. Many of the things that they do behind the scenes can make the process much easier for you. For example, a real estate agent should put a cooperation clause in the listing agreement and in the purchase agreement that says that the parties understand that the taxpayer is doing an exchange and everyone agrees to cooperate with that. If you don’t have an experienced real estate agent, you are not going to finish all of those things that need to be done behind the scenes. 

#5 Your CPA Reports the Exchange on IRS Form 8824

Also, having a CPA involved in the transaction can be very helpful. Many people don’t think to call their CPA until the exchange is over. However, that is tough on the CPA because then they have to forensically figure out what was done, and they have to dissect the transaction in the rearview mirror. Rather than do that, you will want to involve the CPA early in a consultation, and then keep them posted as you progress through the process. That way, when it comes time to report the exchange, they are familiar with the transaction. They will know the date on which you identified your replacement property because you communicated with them throughout the process. Therefore, your CPA will be able to report the transaction correctly.

#6 Your Tax Attorney Is On Call To Give You Advice And Legal Opinions

Another critical person to have on your team, or at least on your bench, is a tax attorney. A tax attorney can do the research, and more importantly, give you an opinion on questions that you might have during the 1031 process. Some of the questions might be as follows: “Can we do this exchange? Is this appropriate? What are the parameters? Where is the gray line turning into black?” The tax attorney is a critical player, and many people overlook this because they think that this is so cut and dried. However, as in most things in life, and especially in the area of tax law, not everything is cut and dried. Therefore, you need a tax attorney on your team from the outset.

#7 Your Financial Planner Makes Sure Your Assets Match Your Goals

The last person that you want to have on your team, and the person that you don’t often think about, is a financial planner. This person will be an adviser who can make certain that the properties that you are purchasing as a replacement are appropriate for your overall portfolio of investments. If you are ninety-nine per cent in real estate and don’t have any exposures to stocks, bonds, gold or other investments, perhaps you need to rethink this and do a partial 1031 Exchange. Or, you might find a way to finance your real estate holdings to expand and diversify into other areas. So, a financial planner can be a critical part of making certain that the replacement properties that you buy are appropriate with your overall goals, your adversity to risk, and the length of time that you think you will hold these properties.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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