Use 1031 Exchanges to Close More Deals

Use 1031 Exchanges to Close More Deals

February 1, 2005

Investors love 1031 exchanges because they can stave off settling with Uncle Sam. It also has become an increasingly valuable tool to real estate practitioners who have capitalized on their knowledge of tax-deferred exchanges to cultivate fresh clients and increase referrals.

Also known as tax-deferred exchanges, 1031 exchanges refer to section 1031 of the U.S. Internal Revenue Code, which allows investors to defer capital gains taxes when they exchange qualified real estate for “like kind” properties.

“My knowledge of 1031 exchanges has allowed me to open my business to a whole new client base,” says Walt Phillips, ABR®, a salesperson with Keller Williams Realty in Plano, Texas. In 2004, 30 percent of his business came from 1031 exchanges.

Julie C. Cambra, CRS®, GRI, principal broker with Blue Heron Realty, Cambra & Associates Inc. in Springfield, Va., estimates that she has generated $50 million in 1031 exchange business during the 14 years she’s been doing them.

Others have used the knowledge to build long-term relationships. “Investors tend to invest for long periods, so once you get together with such clients and provide good service, they’re usually clients for life,” says Mike Rooney, broker and manager of Prudential Nevada Realty in Sparks, Nev.

And understanding 1031s helps more than your business; it also can benefit you personally. Cambra spotted a commercial investment opportunity and exchanged some of her personal residential holdings for commercial property.

What You Don’t Know …

Even if you do few 1031 exchanges, the general public expects you to have a working knowledge of them. “Financial planners have been advising people to invest in real estate and we’ve seen a significant increase in people buying investment property in all of our markets,” says Gretchen Pearson, CRB, chief operating officer for Prudential CA/NV/TX Realty in Pleasanton, Calif. “I expect more people to do 1031s in coming years.”

Not knowing about 1031s could lose you potential business. Cambra had a client who planned to sell some property and shift the proceeds into bonds. She crunched some numbers and showed the client the significant tax hit associated with selling the property outright vs. the benefits of doing an exchange. The result: A 1031 deal and a happy new client.

Sandy Sutton, e-PRO®, a salesperson with Prudential Texas Properties in Colleyville, Texas, points out that when you’re able to educate sellers about 1031 exchanges before they sell, those clients are likely to buy a higher priced property because they have more to spend on a new investment— after all, they didn’t have to turn over a chunk of money to the government.

Moreover, such advice can prove especially lucrative because investors often exchange one property for two. Just do the math: one client, three transactions (one sale and two buys).

Look for Prospects Everywhere

Don’t limit yourself to finding serial investors or deep-pocketed clients. Small investors—even those with a single property—are terrific prospects for 1031 exchanges, especially in areas where property values have soared.

The Florida Panhandle has seen annual appreciation of 20 percent to 30 percent in recent years and some individual investors are sitting on goldmines. Donna Fries, GRI, started tapping some of those clients and now derives an eye-popping 85 percent of her business from investors and 1031 exchanges.

“I market myself as a 1031 expert and promote my knowledge on my Web site,” says Fries, an associate broker, office manager, and development marketing director with Arlyle Realty and Appraisal Services LLC and Three Dunes Development LLC in Panama City Beach, Fla. “I also discuss it on my weekly radio show, where I invite 1031 experts to talk about the process and changes in the law.”

Those savvy about 1031s can start thinking creatively. For instance, one way to ensure that you see your college-attending child from time-time is to purchase a property in the college town and hold it as a rental, and do a 1031 exchange after graduation.

Working with 1031 tax experts and attorneys, Fries found a way to let investors do tax-deferred exchanges from existing condos into pre-construction condos. Sutton recommended this strategy to one of her clients.

Phillips generates business by helping landlords with leasing. “Many don’t like doing rentals because the money isn’t very good,” he says. “But now I look at it as lead generation. Listing rentals is doing a great service for property owners and when they see you do a good job, they refer friends to me. It’s a lot of work for a small amount of money, but now I see the long-term gains.” It also gives Phillips access to tenants—his future buyers or investors.

Stay Smart

Education in the basics is critical to developing a successful niche in 1031 exchanges, and staying up to date on changes in the tax code is equally important. As any practitioner who has dealt extensively with these types of transactions can tell you, there are many subtle nuances and interpretations of the IRS code. So it’s important when you’re doing your first few deals to always admit when you don’t know the answer to a question. Giving the wrong advice can land you in more hot water than simply saying, “I don’t know the answer to that question, but let me look into it and get back to you.”

Also, always work with a qualified tax adviser on these types of deals. Pearson says Prudential California Realty has a tax expert who delivers weekly e-mails about 1031 exchanges to the company’s practitioners. And Ruth Dickie, manager of Long & Foster Real Estate Inc.’s Bethesda/Gateway Office in Maryland, wants everyone in her office to have a working knowledge of 1031s so she holds a major training session every other year. Updates on 1031 exchanges are a regular topic at sales meetings.

Although 1031 exchanges can be a lucrative marketing tool, real estate practitioners stress the importance of not straying over the line and delivering tax advice strategies. The nitty-gritty details of clients’ 1031 exchanges should be handled by attorneys, tax advisers, and qualified 1031 intermediaries.

1031 Exchange Marketing Tips

All of the practitioners interviewed for this article provided their best tips for capitalizing on 1031 exchanges for their business:

  • Pursue and accept rental business. You gain access to active investors and a means of building long-term relationships with them.
  • Promote your knowledge of 1031s to fellow practitioners to boost referral business. Sutton recently worked with a Florida practitioner to close a 1031 deal for a client. She’s now more likely to receive and send referrals to that person because of their shared interest in and knowledge of 1031s.
  • Keep 1031 exchanges on clients’ minds. Sutton includes articles, tips, and updates in all communications with prospects. “I’m constantly trying to turn on light bulbs in clients’ heads,” she says.
  • Search public records for non-owner occupied properties and send owners materials outlining how they could benefit from 1031 exchanges.
  • Sponsor seminars for prospects that feature 1031 experts—CPAs, attorneys, and other experts.
  • Promote your knowledge of 1031s in all marketing materials, such as newsletters, ads, business cards, and brochures.

Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.

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