Here’s how you can get more closings by using a 1031 exchange
Updated: Feb 21
As real estate professionals, realtors are typically the first person that clients hire to help them buy or sell property. This puts realtors in a unique position because they are hired to share their firsthand knowledge of the real estate world with their clients while navigating their clients to make smart and prudent real estate decisions. Realtors are always looking to get more closings and why not expand one’s portfolio by learning and administering 1031 exchanges.
Whenever a realtor has a client that is wanting to sell property that is not their primary residence, they should be thinking would a 1031 exchange work in this situation? Realtors that have 1031 exchange knowledge and/or experience, instantly make themselves way more marketable to their clients and future clients, as well as separate themselves from their competitors. After all, the 1031 exchange has been part of real estate for more than one hundred years.
Realtors should be on the lookout when they represent clients selling property that is not their primary residence, and they should immediately ask their clients if they are planning to buy another property for investment or business purposes. Realtors should be asking their clients this because a 1031 exchange could be the best solution and fit.
Realtors would explain to their clients that a 1031 exchange is a tax break, part of the IRS’s tax code, which would allow their clients to avoid paying capital gains when they are swapping out one investment property for another. This is where you as a realtor could really stand out from your competitors. In this type of situation, realtors would not only be giving shrewd real estate advice, but they would also be saving their clients a considerable amount of money in the process.
A fair question that realtors may ask themselves is why I should know about 1031 exchanges and how they benefit me.
First, realtors can earn at least two commissions instead of one. With 1031 exchanges, remember that the seller must purchase a replacement property. Furthermore, with a 1031 exchange, multiple investments or business properties can be exchanged for the one sold. Therefore, realtors can get a commission for the property that is sold as well as the property or properties that will be bought in exchange. Next, realtors can gain additional clients and increase their listings by marketing themselves as 1031 exchange consultants.
What are three important 1031 exchange rules that realtors should know and immediately explain to their clients who are interested in pursuing a 1031 exchange.
One, replacement property or properties should be of equal or greater value to the one being sold. If this rule isn’t followed and the value of the replacement property is less than the relinquished property, then the difference is called boot and it is taxable.
Second, realtors should advise their clients that they need to plan before performing a 1031 exchange because the IRS only allows a 45-day window to identify a replacement property for the one that is being sold. As realtors, you should be pragmatic by already researching and finding potential replacement properties before the initial property is sold in a 1031 exchange.
Third, there is a 180-day window to purchase the replacement property. That means that once the current property is sold, the IRS only allows a maximum of 180 days to purchase the new property or properties.
A few other good pointers for realtors to know about 1031 exchanges are: (1) the exchanged properties must be similar in nature and function; (2) the money made from the sale during the exchange must be held in escrow, or the proceeds will become taxable; (3) only individual taxpayers can use 1031 exchanges, not property-owning entities such as partnerships and LLCs; and (4) you must report a 1031 exchange to the IRS by using Form 8824.
As real estate professionals, it is advantageous for realtors to add 1031 exchanges to their tool belts. While 1031 exchanges to some people might seem daunting or a waste of time, to others it can be a goldmine. Remember that being knowledgeable and able to do 1031 exchanges as a realtor will only make you more marketable and get you more closings.
By having the knowledge and skill set of 1031 exchanges, you as a realtor will stand out from everyone else that doesn’t.
-Robert Sosower, Associate Attorney
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