A Gift to Uncle Sam
We were three days from closing on a 45-day escrow. I was working with a first-time buyer who was becoming more and more anxious as the closing date grew nearer. Then, I received a call from the listing agent. Her client, an “experienced” investor, wanted to perform a 1031 Tax-Deferred Exchanged.
“What,” I asked her. “Now you tell us?”
To say the least, I was pretty disappointed with the agent because from the beginning, I brought the subject up and she continuously told me her client didn’t want to perform one.
“Is your client performing a 1031 Exchange,” I asked her on one occasion.
“Are you sure he’s not performing a 1031 Exchange,” I asker her on another. “He’s purchasing another property. He’s going to get killed on taxes!”
Finally, I just came out and asked, “You did discuss an Exchange with your client, right?”
On each occasion, she assured me it had been discussed and he just didn’t want to perform one. She also made it clear that she had been in real estate for a number of years and knew what she was doing. The case was closed for me! It’s in her hands now.
For those who may not know, a 1031 Tax-Deferred Exchange (also known as a “1031″ or “Exchange”) is the method for exchanging one investment property for another one, while deferring the possible capital gains tax. The financial gain you would realize can be deferred as long as you follow the rules set out by IRS Code 1031where the name comes fromand you use proper professionals who know and understand the process. They should also be able to explain the process to you and help you follow your requirements under the code. This is important because if there are any mistakes made, you could be left holding the legal and financial bag. That financial bag would be in the form of a healthy tax consequence levied by Uncle Sam! If used correctly, this a true wealth-preserving tool.
Fortunately, we were working with an experienced escrow officer. Early in the escrow period, she looked at me and asked, “Why the hell is he not doing a 1031? I know he’s purchasing another investment property!”
That was an answer I could not give her…until the call from the listing agent.
It turned out her “experienced” investor didn’t even know what an Exchange was.
Because my escrow officer was experienced, she knew exactly what to do. In fact, it was as if she knew what was coming. She set up a Delayed Exchange and we only had to close a few days later than scheduled, at no additional cost to my client. She was a lifesaver! If it weren’t for her, this situation could have turned out differently.
If an investor can only get one thing from this story it is this: If you do not perform a 1031 Tax-Deferred Exchangeor any other equivalent wealth-preserving toolyou might as well place tens of thousands of dollars in a cute box, wrap it up nicely, put a pretty bow on it, and give it to Uncle Sam!
Lawrence D. Elliott has been a Realtor® for over 16 years and provides professional representation for clients in Los Angeles, Orange, San Bernardino, and Riverside counties. He can be reached direct at 1-888-810-SOLD. He also runs a network of real estate web sites, which can be accessed through his main site at http://www.LawrenceElliott.com
