It behooves you to begin building a team who understands 1031 exchanges whether you are an agent or an investor.  Although, the basic principles of an IRC 1031 Exchange are fairly straightforward, each sale of relinquished property and purchase of replacement contains a variety of issues that must be analyzed by the investor's tax advisory team.

Agents

If you are taking a listing of non-owner occupied property, these are some important questions to ask. By asking them you will be differentiating yourself from the competition. You will also be helping your client by taking a proactive role.

1. Have you discussed doing a 1031 tax deferred exchange with your tax advisor? You could potentially defer 100% of the capital gain tax due from the sale.

2. How long have you owned the property?  (You are checking whether the property meets the definition of held for investment. If it seems like a very short holding period, point out that the client needs the advice of his tax advisor before proceeding.)

3. How is title held?  If it's held as Tenants-in-Common with another person, You need to ask additional questions like whether they have listed it as an asset on a Schedule K partnership return.

These are very important questions because this will alert you to potential partnership issues, LLC issues, Grantor Trust issues and from whom the client needs to seek advice.

For Example: If it is held as a partnership , LLC or corporation they will need to decide whether to keep the entity intact and do the exchange or whether the partners want to pursue different goals with the sale proceeds. If they want to pursue different goals with the sale proceeds, they will most likely need to meet with their tax advisor and a business attorney. The clients will retain a lot more flexibility if they seek this advice prior to listing the property. By asking these questions, you can potentially save yourself and your clients numerous headaches.

If a trust is involved they will also need to seek the advice of their estate planning attorney to find out how the trust will be affected if this property is sold.

4. What do you want to buy as replacement property?  If they answer that they'd like to buy a bigger house to live in; this should alert you to the fact that they don't understand the 1031 process. You will need to explain to them the definition of like-kind property i.e., investment property for investment property.  Then send them to their tax advisor to reinforce the message. The tax advisor may have some strategies to assist them in achieving their goal.

5. Will their be a loan payoff on the sale of the property? This will alert you to the fact that there is a risk of mortgage boot if the investor does not take an equal or greater loan  on the replacement property. Again the tax advisor can be of great assistance in reviewing their options.

The Team

As an agent working with clients doing 1031 exchanges, you should develop at least three referrals to the following types of professionals:

CPAs experienced working with clients who own investment property and 1031 exchanges

Real Estate Attorneys

Business Attys

Estate Planning, Probate & Trust Attorneys

A reputable Qualified Intermediary who has been in business for a substantial period of time who has the backing of a large company willing to guarantee its performance in addition to its fidelity bond and E & O insurance. This QI should ask at least the questions above before attempting to answer your question. Qualified Intermediaries are disqualified from giving tax and legal advice, so their answers to your questions should be educational in nature and ultimately referring you back to your client's tax advisor.

For more information regarding the basics of 1031 exchanges, please see Asset Preservation, Inc.'s website  http://www.apiexchange.com/ and the free webinar and podcasts offered http://apiexchange.com/index_main.php?id=25.

You may also call 800.282.1031