You’re thinking of selling your investment property and you don’t want to pay the taxes? You are considering a 1031 exchange, but don’t want to make the common mistakes investors make? In this video MANSARD President, Jeremy Cyrier, CCIM & MANSARD Commercial Real Estate Advisor, Howard West discuss this topic and provide tips to avoid making some of the common mistakes.
3 Common Mistakes Discussed
- Don’t make a confuse making a bad real estate investment decision just to avoid paying your capital gains taxes.
- Don’t think that your attorney, broker or accountant is enough. A QI will hold your funds and ensure that you follow the correct procedures.
- Use a Qualified Intermediary – Ask for referrals and check their credentials.
Are you considering or involved in a 1031 exchange? For more information, contact Jeremy Cyrier, CCIM at firstname.lastname@example.org or by phone at 617-674-2043.
Jeremy Cyrier: “I’m Jeremy Cyrier, I help real estate investors make successful financial decisions in commercial real estate investments; and, Howard?”
Howard West: “I do the same. I’m a commercial real estate broker at MANSARD, and I help clients do the same thing; make successful financial decisions.”
C: “So, today we have a question. The question is, you’re thinking of selling your investment property and you don’t want to pay any taxes. We meet a lot of people that have this problem. Unfortunately, the IRS is a silent partner in your investment property, but there are some ways to defer the capital gains. So, you may have heard a 1031 Exchange is a one way to do that, but your concern is avoiding some of the mistakes. So, we’re going to talk about three of the common mistakes that real estate investors make when they’re planning a 1031 Exchange. So, Howard, what’s one of the things that you’ve seen in your experience with investors?”
W: “One of the things I’ve seen is investors who go to someone like an accountant, who feel like they’re getting all of the expertise they need for a 1031 Exchange. But they really need to go to more groups than that, and one is a qualified intermediary.”
C: “So what you’re saying is that going to a CPA, an accountant, an attorney, a broker, and thinking that they’re going to be someone who can handle your 1031 Exchange in an administrative way is a bad idea. Those professionals all provide an important service to the transaction, but that you need to have the right person, which is – what’d you say – a QI, a Qualified Intermediary?”
W: “That’s right, that’s right.”
C: “I heard a story – a qualified intermediary – there was a company called – what were they called – it was Southwest Exchange. Back in 2007, the owners of that company got in big trouble; they lost ninety five million dollars of their clients’ money. They were holding this equity for their clients in exchanges. I guess they had gone out and invested in a breast implant manufacturing company.”
W: “That’s right.”
C: “And, the investors that were using Southwest lost their money. So, what are some of the things that we should look for with a QI – a qualified intermediary?”
W: “Well, there’s a number of things. I mean, one is technical expertise. you wanna make sure they’re doing it properly, and they have the knowledge and they have the experience doing this.”
C: “So, technical expertise is important. What else are we looking for?”
W: “We wanna make sure they have good coverage of Errors and Omissions insurance.”
C: “So, E and O, errors and omissions coverage.”
W: “It’s really what that says it is, it’s for any errors that the QI can make. It will cover you for that.”
C: “So, you know, one of the mistakes that we saw at our firm was a client was planning to do a 1031 Exchange and called their CPA and said, “Hey, I wanna take advantage of this rule and not pay my taxes,” and the CPA said, “You’re all set – no problem – I’ve got it all taken care of.” The client then went and closed on the property. We went back a week later to meet to get the information on who to contact for the qualified intermediary service, and the client said, “Oh, just call my CPA.” We called the CPA, and the CPA said, “What are you talking about?” This guy ended up having a $500,000 tax problem. He had to pay to the IRS because he had called his CPA and the CPA didn’t do the process correctly. So, if you’re thinking about doing an exchange, when should you be in touch with the QI? At what point in the process should you reach out to one?”
W: “Well, you really want to reach out to one in advance. Really, as soon as possible. You wanna – there’s more than one QI out there and you want to make sure that you pick out one that is a good fit that has the expertise and knowledge that they really need.”
C: “So, if I wanted to find that person, would I just go online and look or would you suggest I call a broker, a commercial real estate broker, maybe a investment broker who is experienced in this space; really get a reputable referral? Or my accountant, or my attorney, or even a friend who did an exchange recently.”
W: “Yeah, I mean, you want to speak with professionals who have experience with a 1031 exchange.”
C: “Ok, alright.”
W: “So, a broker could a broker could bring you a good one, maybe a lawyer that has experience with a 1031 exchange. Um, it could be a number of different sources -”
W: “and, um, it could be – it’s really important to find a company that’s been doing it for a long time, that has the Errors and Omissions insurance that you should have. Another thing is a fidelity bond, which could – it could cover you in case there’s any kind of theft or embezzlement of the money.”
C: “Ok. Don’t want that to happen.”
W: “Really don’t, really don’t.”
C: “We really have to worry about. One of the other big mistakes that we’ve seen is if you get into a 1031 exchange and you have what’s called a 30-45 day identification period. Sometimes, people end up making bad decisions on real estate.”
W: “That’s right.”
C: “Right? So, they sit down and they say, “Well I could buy this property, it’s not a great investment, but I’d rather do that than not pay the taxes. Um, so, we certainly would never want you to be in that position. If you were going to complete a 1031 Exchange, we want to make sure that you’ve planned it well, and that you avoid some of these common mistakes that investors make. So, just to recap, make sure that you’re using a qualified intermediary, who’s a credible, bonded, and insured resource. You want to make sure you’re not relying on just a CPA, or an accountant, or even your real estate broker to act as that QI, and don’t – be sure to plan well in advance of your sale so that you don’t end up in a position of either making a bad investment decision or paying taxes. What we want for all of our clients and for you is to make sure that you’re making financially successful commercial real estate decisions. So, I appreciate your listening to the video – watching the video today. If you have any questions, or would like to reach out to us, you can contact us at www.mansardcre.com. Again, my name is Jeremy Cyrier.”
W: “I’m Howard West.”
C: “Thank you.”