One of my favorite old westerns is “El Dorado”. Yes, it stars John Wayne and Robert Mitchum. Yes it has James Caan and Arthur Honeycutt. And, more importantly, it has Charlotte Holt and the cutest Cary Michelle and, of course, the golden tunes of George Alexander singing the theme song…
In the movie, the bad guy, Ed Asner tries to steal a ranch owned by the McDonald family. In the end, Wayne, Mitchum, Caan and Honeycutt come to the rescue and the ranch is saved. Maybe the best part is when Ed Asner gets shot about a gazillion times at the end. Considering how he treated Mary Tyler Moore about 80 years later, he got what he deserved. The moral of the story is, when the McDonalds thought that they would lose their ranch, the gang came to the rescue and that is what we are going to discuss.
Like the McDonalds, landowners are under attack and now it’s from Congress. Congress is actually considering making changes or even revoking 1031 exchanges. What are these people thinking? Real estate associations, qualified intermediaries, and all kinds of people and groups associated with real estate have been lobbying; however, their efforts may be falling on deaf ears. Maybe Congress should be spending more of its time on spending reform and leave 1031 exchanges alone.
So the million dollar question (before taxes!) is what can a landowner do if 1031 exchanges are no longer part of the tax code to defer taxes. Well, there is good news! If there wasn’t, would I be writing this blog?
There is a great opportunity today for RLI members to assist their clients to defer taxes when the sale of a great property creates a large tax liability. That can be any type of property including a primary residence. Not only is there a way to defer taxes with a 20-year track record of success, but it may also be more flexible than a 1031.
I am fortunate to be one of the few advisors nationwide with access to a proprietary trust that was created by some of the smartest tax attorneys in the country to defer taxes when the sale of a highly appreciated asset creates a large tax liability. The IRS conducted a two-year examination of the proprietary trust and that examination was concluded in Washington DC. Other regulatory agencies have also conducted examinations and had not had any concerns.
Our proprietary trust has a 20-year track record with over 2,000 trusts being successfully created with our largest transaction being over $100 million with a tax deferral of $50 million. The proprietary trust has also successfully passed all 13 IRS audits with no changes recommended by the IRS. Our proprietary trust is on solid legal and tax ground but it is always important for your clients to do their due diligence as well. Because of the flexibility of our trust, almost any situation where there is a tax liability can be an opportunity for RLI members to sell more real estate by deferring taxes. Here are a few of the opportunities where our strategies may be useful.
Imagine for a moment if you could defer your sellers’ capital gains tax, state tax, depreciation recapture, and the Obamacare tax on their hard earned sales proceeds and you can defer them indefinitely. Imagine being able to defer those taxes without 45 or 180 day periods, no loan to value ratios, and your seller can buy any type of property at any time in the future. If it takes a year to find another property, that’s fine.
Imagine that you have a farmer or rancher client that has worked his property for decades and would like to sell and retire. You can sell that property and defer those taxes on his hard earned sales proceeds and give the seller a larger retirement income than if he had to pay taxes first.
Imagine all the times in the past that either your seller’s 1031 exchange couldn’t be completed or 1031 exchanges aren’t appropriate. Being able to defer those taxes today, and without an exchange, provides a great opportunity for your sellers. If you can’t identify a property in 45 days, no problem. If it takes six months, we can still defer taxes. You identify a property and if a problem of some kind occurs and the exchange falls apart, we can still defer taxes.
Has this scenario ever happened: You are selling a great property for your seller but he refuses to accept any offer until he finds a replacement property, and six to eight months later he is still looking for one. What if instead, you sell the property now, defer taxes now, get paid now, and, if it takes a year to find that replacement property, everyone is happy.
Say you found a great buyer for your seller. There is a slight problem. The seller is going to have a large tax liability and would like to defer taxes using a 1031. Unfortunately, the buyer has to pay for the property over four years. A 1031 exchange to defer the capital gains tax probably won’t work but our strategies will.
Say you have three owners of a great property that want you to sell the property for them. One owner wants to take the proceeds and run. The other two owners want to defer taxes. A 1031 probably won’t work but our strategies will.
You have a great client who is thinking about selling his high end residential property. He is going to have to pay millions in taxes. You can defer his capital gains tax, state tax, and the Obamacare tax on the sales proceeds. In gratitude, maybe he will buy a ranch or farm from you.
As a long-time partner of the RLI, I have worked with brokers all over the country. We have deferred millions in taxes and we are now also working with large institutional buyers of rural properties. Our Section 453 tax deferral strategies have been utilized successfully over 2,000 times with our largest transaction being over $100 million with a tax deferral of $50 million.
The bottom line is… relax. If Congress is smart, they will leave 1031 exchanges alone and our strategies can be a great Plan B. If Congress ends 1031 exchanges, we may have a better option to defer taxes, and in more situations. If there is a potential tax liability, let’s chat and see if there is an opportunity to defer that tax liability. Your sellers will love you.
Every time I watch a John Wayne movie except maybe The Quiet Man, Wayne comes to the rescue and I always wish that was me. Now is my time to come to the rescue and help your property owners sell a great property and keep more of their hard earned sales proceeds in their pockets while sending less to Washington and their local state capital.
About the Author: 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