I Walked Into a Bar......

True story! I walked into a bar and standing at the bar were four individuals, a Clergyman, a CPA, a Banker and a Realtor. The four were having a good time sharing stories about their work. The clergyman turns to me and asks what I do for a living. Being in a niche industry of facilitating 1031 exchanges, I assume very few people know about 1031s or its benefits, so I began to provide a brief explanation.

The clergyman immediate interrupts me and states he is very familiar with 1031s and how the taxes saved in a 1031 exchange result in increased contributions to his church and additional moneys spent in the community. In turn, the community prospers and unemployment and crime are reduced. The clergyman stated he even completed a 1031 exchange for his personal investment into a property he rents at a discount to those less fortunate. The clergyman was very supportive encouraging me to "keep up the good work".

The CPA chimed in indicating "of course I am familiar with 1031 exchanges". "I often recommend exchanges to my clients when selling investment property." The CPA further explained how 1031 exchanges allow his clients to relocate to a better suited property, to utilize the 1031 to leverage into a more expensive property, to move funds from a high income tax state to a lower income tax state, to purchase multiple properties from the sale of one property, to increase net worth, to increase returns on revenue, to pass assets to heirs tax-free, and numerous other benefits. The CPA indicated that without 1031 exchanges, his clients would not sell or reinvest investment property resulting in a slowing of the economy overall. Auto sales, appliances, construction, banking, inspection companies are among a few of the industries that would be impacted by a reduction in real estate sales. The CPA was happy the tax reform of 2018 did not eliminate 1031 exchanges for real estate. I shared in his joy, as if 1031s had been eliminated, I would be searching for employment right now and not writing this article.

The Banker was not really interested in the conversation as his bank's lending practices treated 1031 exchanges as investor loans with higher rates and fees, thus making him less competitive to a lender who permitted 1031 exchanges and lower rates for vacation homes. Apparently, the Banker's underwriters were not familiar with Revenue Procedure 2008-16 which permitted 1031 exchanges of vacation homes where minimal criteria was met. The Banker was upset that he lost numerous opportunities from March 2008, when the Revenue Procedure was issued, to the current date because of the lack of knowledge of his bank. I forwarded a copy of the Revenue Procedure to the Banker immediately upon returning to the office with the hope his underwriters would reconsider their policy. Perhaps their acceptance of the Revenue Procedure will generate more loans for the bank.

The last person to chime into the conversation was the Realtor who had a little bit of a puzzled look on his face. The Realtor's first words were "I didn't think anyone did exchanges anymore." I explained that 1031 exchanges are a national benefit and are very much active. Certain real estate markets have been slower to recover from the downturn of 2007 but with properties received by gift, depreciation deductions taken through the years, and prior deferred gains from 1031s, there may still be a taxable gain when selling a property, even if the seller is upside down with their lender, making 1031s an important discussion item when taking a listing. I further explained that the 1031 creates a motivated buyer, with higher than usual down payments and specific time frames to complete the exchange. The exchange also provides a second commission opportunity for the Realtor. The Realtor agreed that he should incorporate 1031 exchanges into his listing presentation, where applicable.

The moral of this story is there are many subjects that appear insignificant or small in comparison to the bigger picture and are often dismissed, overlooked or misunderstood, but when explored, have far reaching indirect impact on many. Spread the word!