Don’t Let Clients Miss a Big 1031 Exchange Opportunity

November 12, 2013

Before the property investment deal is sealed, ask your clients one important question: Do you know if you’ll owe taxes on the sale of your property, even if you’re taking a loss on it?

That conversation might be key to helping them unlock big tax savings by avoiding a common misconception: no profit means no taxes, investment specialists Rochelle Stone and John Mangham said at a session called “Investors Make a Comeback: 1031 Exchanges Return” last Friday at the 2013 REALTORS® Conference & Expo.

Once clients realize they could be facing a hefty tax bill, even when they’re selling at a loss, they could benefit from options that 1031 exchanges provide them, said Stone, president of Starker Services Inc., a firm that assists with these types of transactions. “Don’t let your clients leave their equity behind,” he said.

A 1031 Exchange is a tool for investors to defer capital gains taxes on the exchange of like-kind properties. This tax-savings strategy can help investors avoid a tax liability when they sell one investment property and buy another.

Stone cited one example in which taxes were owed on a property sold at a loss. The client purchased a rental property in 2001 for $495,000. The property sold for $477,000, an $18,000 loss. Yet, the owner faced a tax of nearly $20,000 on the sale, because taxes are paid on capital gain, not the equity or profit from the sale. The owner had claimed depreciation on the property over 10 years of ownership, netting an $80,000 gain that still had to be factored in. If the owner had done a 1031 exchange, the owner’s tax bill would have been zero, Stone said.

While you don’t have to be an expert on 1031 exchanges, you should be able to ask the right questions to identify when your clients should consult a tax attorney to see if they can unlock some of the benefits, the speakers said. Some questions to ask your clients:

  • Do you know if there will be a tax hit from the sale of the property? (Encourage them to consult a tax attorney before the sale so they can explore options beforehand.)
  • Are you sure there is no capital gain? (Make them aware of a difference between profit and capital gain.)
  • What are their plans? Are they willing to invest in other opportunities?

These and other questions enable you to help your clients determine when tax-deferred exchanges might work for them.

—Melissa Tracey, REALTOR® Magazine

Read more:

Understanding Capital Gains in Real Estate
Eight 1031 Exchange Rules You Can't Ignore
Capital Gains: Big Boom, Big Tax