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? At Iowa Equity Exchange, we say, "Help your clients grow their investments, not their tax bills!" We also say, "Help yourself by helping your clients."
Here are a few questions that are commonly asked by real estate agents:
Q: WHO SHOULD I CONTACT TO SET UP AN EXCHANGE?
A: As you might expect, we strongly suggest that you call the office of Iowa Equity Exchange in West Des Moines, Iowa, at 515-224-5259! We can act as the intermediary for your exchange anywhere in the United States.
Q: WHEN SHOULD I CONTACT IOWA EQUITY EXCHANGE?
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 if the transaction closes, similar to your real estate commission, 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 by 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 Iowa Equity Exchange, Qualified Intermediary, for the purpose of completing an exchange. Buyer of the above-listed property agrees to cooperate with Seller and Iowa Equity Exchange 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 §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. Too often, your client will think, "Well, I'll just pay the 15% federal capital gain tax and not worry about it," without thinking about the cost of state capital gain tax and depreciation recapture. (See my blog below titled "Tax-Deferred Exchange 101" for details about the three-pronged whammy that is levied against the investor who does not use Section 1031 when s/he sells property.)
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.
Q: CAN A §1031 TAX-DEFERRED EXCHANGE BE SET UP AT THE LAST MINUTE?
A: Yes. As long as the transaction has not closed, Iowa Equity Exchange 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 needed. However, once the closing has occurred, even if the seller has not deposited the proceeds check, it is too late...
In closing, remember this - it will not hurt anything to investigate the possibility of structuring an exchange. And think about this - 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.
Good exchanging... let me know if we can help.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
