Did you ever miss an opportunity to use a 1031 exchange?

Question

Sometimes the market is just right and you find a great buyer. You unload the property, because how can you pass the offer up.
I've seen some owners sit on that cash, very happy with the profit, but don't end up taking advantage of a 1031 exchange or like-kind exchange (a rule in the tax code which lets you defer the gain on the sale if you are also purchasing a property in the same class - google search for a more comprehensive definition!).

One story I heard a few years back from a CPA, was of a client who had farmland in Oklahoma. This farmland had been in the family for generations. It was finally discovered that the land was located on top of an oil deposit!

They sold the land for a mix of property/cash making part of the sale eligible for a 1031 exchange.
BUT, they weren't alerted to this fact until a chance conversation over dinner with a VP of Tax friend of theirs. (Their first CPA hadn't flagged the opportunity)

Instead of having to swallow a huge TAX expense in that year, they were able to defer millions in tax liability.

Wondering if anyone has similar stories of finding out about the 1031 exchange just in the nick of time.
Or the flipside, missing out and learning a lesson for their next sale.

Dave Foster · Answer

@Daniel Francoeur, Bigger Pockets has been a source of much spirited 1031 discussion over the years. And I"m always willing to participate :)

I remember in the early days folks would ask what a qualified intermediary was. We just said if we told em we'd have to kill em. In retrospect that may not have been good for business :)

Dave Foster · Answer

@Daniel Francoeur, my record for setting up a 1031 is 22 minutes. We were actually at the closing table with the purchaser finishing up their 1031. The sellers wanted to know who I was. When they found out what they had almost missed they looked at their realtor and said "Your fired" - jokingly of course, well sort of. We all took a coffee break and 22 minutes later the docs were done for them as well.

I get a call a month from someone excited and wanting to tell me that they had just closed on their house and wanted to to a 1031. I have to give them the bad news that when they closed without a QI in place they can no longer do the 1031. Never good news to have to give or to hear.

The IRS has to let you do them. But they're not about to advertise it. And it's such a small niche (although there's almost 500,000 done every year) that most cpas and attorneys just don't have it on their radar screen.

Alex Olson · Answer

@Daniel Francoeur A lot of sellers have missed out on the tax benefits of a 1031 exchange either because they didn't know about it or they had bad advice from a CPA that didn't understand the rule. It it's basic form - the rule is that you must hold all funds from your sale (at closing so you never touch the money) by a qualified intermediary. At that point you have 45 days to identify up to 3 properties (I recommend identify 3 properties - no more no less) that are equal or greater in value (sold price) than the property you just sold. That's the basics - yes there are more details about it and different strategies but if you are like me, keeping it as simple is possible is the key to ensuring success your first time around.

Daniel Francoeur · Answer

@Dave Foster that is a great example. I wonder how many of those opportunities go missed a year. I was even talking with my parents about their secondary residence. If they do some planning over the next few years, they could even 1031 that property. With the increased uncertainty and recent stock market losses (if you sold at the wrong time), I'd hate to see someone lose out on an opportunity to decrease that tax bill significantly.

Oh man, I didn't know the QI had to be identified at close. A discussion about 1031 exchanges needs to be on every real estate person's checklist.

Did you ever miss an opportunity to use a 1031 exchange?

Did you ever miss an opportunity to use a 1031 exchange?

Most Popular Reply

4 Replies