I took a call from a taxpayer yesterday. She wanted to ask some questions about a Section 1031 exchange. Her accountant told her to get in touch with us. Great, that’s what we do. She informed me that she and her husband purchased some land many years ago in what was then “way out of town”. Their hopes were that one day the town would move out in that direction and the land could potentially be a good development parcel. It was.
For a little 2.3 acre slice of land that they paid $38K for, a major chain offered to purchase it to build a gas station and convenience store. Selling price: $2,400,000. Jackpot! Except for one small problem, the ~24% in combined federal and state capital gains taxes that would be due amounted to approximately $576,000. Here is a novel concept for you “very LOW basis”.
So we talked for a minute, and she very casually said “Oh, and we closed on December 6th; but we haven’t touched the money.” [Insert Expletive]
This was a taxpayer who fully intended to purchase replacement property, some other real estate class investments and put aside a little pocket change who now has to write a check for nearly $600K. She was flabbergasted and amazed that out of all the professionals they dealt with not a single one mentioned Section 1031 BEFORE the closing. She paid multiple attorneys, accountants, spoke with her financial adviser, and of course, her now semi-wealthy real estate broker. None of which, at any time said “Hey, did you know that you could put that capital gain to work for you, interest free? But, if you want to use Section 1031, you have to arrange for it before the closing.”
We spend a good percentage of our time educating professionals. In fact, during the last 12 months we have issued over 175 certificates for professional education to real estate pros, attorneys, accountants, enrolled agents, and financial advis0rs. During the classes, one of the things I repeat over and over is that if you have a client who is selling investment property, please, oh please, don’t let them close on the property until they speak to someone, ANYONE, about Section 1031 of the US Tax Code. You don’t have to understand it, don’t have to know the rules, and you certainly don’t have to give tax advice, but for Pete’s sake, get them in touch with someone who does.
This couple could have leveraged over $500,000 of Uncle Sam’s dough for many years to come. Instead, they are shocked and dismayed that some professional along the way did not have the insight to point them in the right direction.
The ironic part of this story is that in the middle of all of this, their real estate broker called them and asked them if they had given any thought about purchasing some additional investment property. Ugh.
There are hundreds of Qualified Intermediary firms all over the country that will discuss 1031 with clients at no charge. There is simply no excuse for this type of thing to ever occur, don’t let this happen to you.