It was a brutally cold, windy and overcast morning in the Dakotas Territory. The year was 1871. Every living creature exhaling air was immediately turned into vapor from the freezing temperatures. We were soldiers in the 7th United States Calvary Regiment and this particular morning, we were not singing “Garyowens”. Thousands of settlers were flocking to the territory and our job was to protect them. At this moment, many of the settlers were being threatened by the bad guys and we were preparing to ride to their rescue.
Commanding F Company was the American icon Capt. John Wayne. His Second in Command was WWII hero Lt. James Stewart. Work with me here. We were divided into two wings. One the left wing, 1st Squad was manned by the great Virginian Sgt. Randolph Scott and 2nd Squad was led by the incomparable Sgt. Errol Flynn.
The right wing was led by the 3rd Squad’s fearless Sargent Glenn Ford, who later helped defeat the Japanese Navy at the Battle of Midway, and the 4th Squad was led by Yours Truly right out of “The Point.” Again, work with me. The battle lines were drawn and we were ready for action. Captain Wayne gave the order and the bugler belted out the Calvary charge. The horses leaped into action, our swords at the ready and at that very moment….my alarm went off and it was a Wednesday morning in 2015. Another missed opportunity to ride to the rescue. Or was it?
Scrutiny Looms Over Section 1031s
Section 1031 is beginning to receive scrutiny by Congress and that’s probably not a good thing. All of the appropriate organizations including the Institute are lobbying Congress to leave 1031 exchanges alone–and for all the right reasons. But this is Congress, and that means that this will probably become a huge political football. I have no inside information but based on being in practice since the late 70s, my gut feeling is that 1031 exchanges will be modified to some extent. Perhaps, the first 500k in capital gains can be passed on to a new replacement property or something along those lines may be the final result.
Can You Help Your Clients Without Using 1031s? Yes!
So, assuming that Section 1031 is changed in some fashion, how can Institute members ride to the rescue to still help their clients defer capital gains taxes, state taxes where applicable, depreciation recapture, the Obama care tax and possibly the alternative minimum tax when selling a clients’ property. Actually, there are options now and you don’t even need a 1031 to defer taxes. Let’s turn a negative into a positive.
Imagine not having to deal with a forty-five day identification time limitation or loan to value ratios. What if you could sell a client’s great property now, defer taxes and at any time in the future, you can buy any property that you would like for your client AND while you are looking for that property, your client can receive a check every month for roughly five to six percent of the sales proceeds while those proceeds are still tax deferred. Do you think that this might give you a competitive advantage over other brokers that are unable to provide this opportunity?
Imagine working and taking constant risks for thirty or forty years or more and when you’re finally ready to retire, you have to write a check for twenty-five to thirty percent of your liquid assets to the US Treasury before you can retire. Well, fortunately you don’t have to but when selling your clients properties, they do have to write a check to the US Treasury for twenty-five to thirty percent of their sales proceeds and for many, that’s THEIR retirement plan. You can still defer those taxes for your clients and keep more of their hard earned sales proceeds in their pocket and send less to Washington, even if a 1031 isn’t appropriate. Do you think that this might give you a competitive advantage over other brokers that are unable to provide this opportunity?
Another tax deferral strategy that might face Congressional scrutiny in the future is the stepped up basis. I have met a number of older land owners who intend to pass their property on to their heirs instead of selling their property because of the large tax liability that the sale will create, and because a 1031 isn’t appropriate. That’s not necessarily a bad strategy unless you make a living selling real estate. If you do sell real estate, it is possible for the land owner to sell their property and defer taxes and turn an illiquid asset into a lifetime retirement income. When the land owner passes on, the income can be passed on to the heirs. And you just sold a great property.
The great thing about the REALTORS® Land Institute is the sharing of ideas and strategies and that’s why Institute members and Accredited Land Consultants (ALCs) tend to be more successful and have higher incomes than non-members I certainly hope that Congress doesn’t make changes to Section 1031 but if they do, we can still ride to the rescue of our clients without having to be John Wayne or….even me. Let’s turn a potential negative into a positive today by recognizing there are other ways to defer our clients’ taxes than a 1031. You will sell more real estate and keep more of your clients’ hard earned sales proceeds in their pockets and sending less to Washington. Happy selling and deferring taxes!
David is a Partner at Creative Real Estate Strategies, a 2015 Silver Partner of the Institute, and has been in the industry since the late 70s. His years of experience help him to assist land brokers in helping their clients defer capital gains tax, state tax and depreciation recapture taxes on their client’s sales proceeds when either their clients are unable to complete their 1031 or the client would like to sell and retire but still defer taxes. By understanding these tax deferral strategies, brokers have been able to sell more real estate. David can be reached at 713-702-6401 or at David@cresknowsrealestate.com