A 1031 exchange  is a great way to help your real estate investing clients build their portfolio of investments.  A 1031 allows an investor to defer paying capital gains tax upon the sale of a property, as long as the proceeds of that sale go towards the purchase of another property or properties, subject to certain conditions. 

Here are a few things to keep in mind as you walk your clients through the process.

Know the benefits of the 1031 and be ready to clearly articulate them to your client.  You’re the consultant, and a clear “call to action” is important if you’re going to provide advice that the client can act upon.  A 1031 allows the seller to defer paying capital gains tax as long as certain conditions are met – this enables the investor to grow his or her portfolio by rolling it into larger investments without taking an upfront tax hit.  Know your investor’s goals and be prepared to explain what a 1031 can do to help.

Quantify the benefit vs. the cost.  The investor will be required to use a qualified intermediary; upon sale of the property the client can’t touch the cash.  The qualified intermediary and associated paperwork will entail a fee.  Compare this expense w/ the benefit of deferring the tax and be prepared to show this to your client. 

Start early.  Getting to closing on time can be hard enough without adding another wrinkle.  Get the process started early; if the client decides to do a 1031 at the 11^th hour then be ready for complications. 

Identify your replacement targets early.  Your client will have 45 days after the sale to identify potential replacements; after that the client must close on the replacement properties within 180 days.  45 days isn’t a lot of time; It’s critical that your client starts seeking the replacements before making the sale. 

Balance leverage:  It’s human nature to be comforted by the fact that your properties are building equity, but leverage is the key to building a real estate portfolio .  Your client has a decision to make: what level of risk is comfortable?  If your client has $200k of equity in a $400k investment property perhaps it’s time to take that $200k and make a 20% down payment on a $1 million multi-family.  Again, understanding your client’s risk appetite is the key factor here.  Find out what the client wants to accomplish in terms of risk and help them identify the strategy to get there.