How to Select the Right 1031 Exchange Advisor
The Role of a 1031 Exchange Advisor
1031 Exchanges have become increasingly popular with property owners because they provide an opportunity to reposition investment property to help meet the owner’s unique goals and objectives – all on a tax-deferred basis. With a 1031 Exchange, property owners can preserve their entire investment and defer all federal capital gains tax, state capital gains tax, net investment income tax, and depreciation recapture that would normally be due upon the sale of an investment property. In some states, the total tax paid could be as high as 37% so the savings provided by a 1031 Exchange may be substantial.
However, navigating the exchange process can be complex and a misstep can result in either a failed 1031 Exchange or the purchase of replacement property that is not suitable for the investment property owner. Additionally, 1031 Exchange rules and timing requirements are very strict and must be followed in order to qualify for tax-deferral. Understanding the basics of a 1031 Exchange and having the right 1031 Exchange team in place is crucial to performing a strategic and successful exchange.
What to Look for in a 1031 Exchange Partner
A good 1031 Exchange partner should not only help you find, select and acquire a 1031 Exchange qualified replacement property, but should also assist you in navigating the exchange rules, debt matching considerations, and unravel property ownership issues. There are quite a few 1031 Exchange Advisors to choose from, however, like any industry, the level of expertise, years of experience, client-focus, due-diligence, and services offered vary greatly from company to company.
When selecting a 1031 Exchange Advisor, you should only consider well-respected 1031 Exchange Advisors that will not only help you find replacement properties but will also serve as a strategic partner. We believe this is what differentiates Real Estate Transition Solutions from other 1031 Exchange companies. At Real Estate Transition Solutions, everything we do centers around providing tax-deferred strategic options that aim to meet a client’s objectives. When we work with a client on an Exchange, we evaluate every option within the context of how it fits with their objectives and whether the option will best position them for potential success. A valuable 1031 Exchange partner will have the following characteristics and will do the following:
- Is established and well-respected. The 1031 Exchange industry is a relatively small community. Word gets around quickly if professionals recommend replacement properties that are not suitable for owners or do not have a firm understanding of the nuances of the tax code. Furthermore, there are new entrants to the industry who have not had the experience navigating multiple market cycles or the great recession. We believe a long-standing proven track record of happy clients dating back 10+ years speaks volumes when evaluating a professional to work with. If you are considering working with a 1031 Exchange Advisor, be sure to ask if you can speak with prior clients – ideally clients who have recently performed an exchange and performed exchanges multiple years ago so that you can hear about both experiences.
- Meets with you to understand and discuss your situation to determine suitability. Developing an optimal transition strategy and selecting optimal replacement property options is a process that must be tailored to the individual client. Some 1031 Exchange companies may take a “choose your own adventure” approach, presenting a myriad of options with little context and analysis shared with the client. The right 1031 Exchange partner should take the time to understand your objectives and should invest in the development of an intentional strategy aimed to position you for potential success. This means having in-depth conversations (ideally in person) to discuss your financial & lifestyle objectives, your investment property, and tax situation to first determine whether a 1031 Exchange is a suitable course of action.
- Educates you on 1031 Exchanges, process, timing, and rules. A good 1031 Exchange partner should always take an education-first approach and be willing to invest the time to ensure a client is familiar with the tax code and all suitable options they have available to them. Your 1031 Exchange partner should provide a balanced perspective, sharing both the opportunities and risks any potential course of action presents.
- Provides strategic consultation. While the timeline following the sale of an investment property is rather short, the exchange process need not feel rushed. Proper planning can serve to extend the timeline and allow for proper strategic decisions to be made. Additionally, some strategies such as a refinance to extract liquidity in advance of a sale, can take a year to “season” before the sale occurs. A good 1031 Exchange Advisor should be patient and willing to work with clients over several years, if needed, to execute a plan that is in the best interest of the client. Furthermore, they should be available following an exchange to address tax, ownership, and estate planning questions as it relates to the exchange.
- Develops a transition plan to help meet your objectives, is strategic, and achievable. An owner’s objectives change as life happens and markets change. A transition plan should be a living, breathing document that can be updated as needed. Intentionality is key to an optimal exchange strategy. A good (and smart) 1031 Exchange partner will always develop a plan that is both strategic and achievable.
- Provides you with all suitable and available 1031 Exchange options. There are many exchange strategies and replacement property options available to investment property owners including fee-simple real estate, net-lease properties, Delaware Statutory Trusts (DSTs), Tenant-In-Common (TIC) property and even Real Estate Investment Trusts (REITs). A quality exchange company should provide all suitable options so that you have the full breadth of choices available to you. Furthermore, a good 1031 Exchange partner should be agnostic to the solution provided and only recommend those that are in your best interest and based on your financial and lifestyle objectives.
- Works with your CPA, Estate Planning Attorney, and Financial Professionals. Your 1031 Exchange Advisor must be willing to work with your other professionals to ensure that all the pieces are aligned and seek a successful exchange. Some 1031 Exchange companies provide these services “in-house” and are constantly trying to cross-sell accounting, estate planning, and financial planning services to their clients. While the integrated approach may appear to streamline the process, we feel it presents a conflict of interest in terms of the recommendations provided to an owner and should be avoided. The real estate transition and replacement property selection process is sufficiently complicated to warrant using a firm that specializes in this space. You would not want your general practitioner doctor performing surgery on your knee, nor should a financial professional who specializes in traded securities develop your exchange strategy.
- Has a strong network of additional professionals to recommend. Should a client need a tax-preparer, real estate broker/realtor, real estate attorney, estate planning attorney, qualified intermediary, or financial professional – a competent and established 1031 Advisor should have a strong network of proven, trusted outside individuals or firms that can be recommended to a client if needed.
- Offers a flexible & competitive fee plan. Compensation for 1031 Exchange companies can be structured in several ways. The approach that is suitable for a client depends on their objectives. Some clients prefer a “planning fee” approach, others prefer paying a one-time commission consistent with fee-simple real estate acquisitions. A good 1031 Exchange partner should be able to provide all compensation structures and have an honest conversation about not only what the fees are, but which fits best with your objectives.
If you are considering a 1031 Exchange and have more questions about building your 1031 Exchange team, contact Real Estate Transition Solutions at 206-686-2211, or email firstname.lastname@example.org
Find Out if a 1031 Exchange is Right for You.
If you are considering selling your investment property and would like to find out if a tax-deferred 1031 Exchange is right for you, contact us to schedule a complimentary consultation to discuss your investment property, objectives, potential tax liability, and tax-deferral options.
Our free consultations can be done over the phone, via web meeting, or in person at our office in Mercer Island, Washington, or in Portland, Oregon. To schedule your free consultation, call 206-686-2211, or click on the “Schedule FREE Consultation” button below.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Aurora Securities, Inc. (ASI), Member: FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a Registered Investment Advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.