If you’re a real estate agent who caters to investor clients, you absolutely want to know the basics of executing a 1031 exchange. For one, if your clients go that route, they stand to save—and make—a good bit of money. If you are the person who recommends it, you receive some brownie points for guiding them toward such a wise decision. And you can put some extra cash in your own pockets, too.
So, what is a 1031 exchange? It’s pretty involved, but in short, it means that a real estate investor can sell a property and reinvest the full proceeds into a new investment property—while deferring 100% of the state and federal capital gains. So it certainly makes good business sense for investors.
The good news for you is that anybody who owns investment real estate is a potential candidate for executing a 1031 exchange, including your past clients. After all, there are almost always better properties out there for your clients—properties which you can find for them. So 1031 exchanges create new sales opportunities for you. Be able to walk your clients through the process, starting by sharing the following benefits with them.
Reinvest more money—and increase profitability
For investors who have a great deal of equity in a property, especially if the property is fully depreciated and no longer provides a big tax deduction, 1031s are often the way to go. Investors will be able to reinvest the full gross equity into more real estate—without taking a hit from property gains taxes. They simply defer the taxes until they are ready to pay them.
With the full amount of equity, they can invest in more (or more expensive) real estate, which ultimately will make them more money. Not only that, but once they invest in new properties, they can benefit from tax deductions they may have lost on the older property. They actually profit more from the newer investments than the old one—and increase their overall cash flow, which opens up even more opportunities.
Unload troubles associated with managing properties
If you work with clients who have grown tired of dealing with tenants, a 1031 exchange can help them to unload properties that are management intensive and opt for properties that require less work. For example, triple-net leases, which make the tenant responsible for upkeep, maintenance, taxes, and insurance, essentially remove any management responsibility, so they gravitate toward those properties. Or clients could sell off individual houses and reinvest in an apartment building, with a 24/7 building manager on call to reduce the time they spend managing tenants and their problems.
When investors complain about the pains of being a landlord, it’s your chance to jump in and offer the 1031 exchange as a solution—while also generating more business for yourself.
Overhaul your portfolio
Executing a 1031 exchange allows investors to diversify their portfolios. Investors who have all their money in one property—perhaps a property they aren’t happy with—can move into new locations or buy different types of property. For example, they could sell their apartment building and invest in several vacation rentals in multiple locations.
On the other hand, executing a 1031 exchange is also ideal for investors who want to streamline or consolidate their real estate portfolio. They can sell off their smaller properties, pool that equity, and use it for a larger acquisition.