In today’s world of commercial brokerage, it takes a lot of hard work, time and effort to find prospects, win clients and fulfill transactions – so much so that we should do all we can to retain those clients we work so hard to win. Wouldn’t it be nice if you were able to turn each fulfilled investment sale into two transactions?
That’s right, turn one transaction into two, significantly increasing your income and solidifying your relationship with your clients. It is actually easier than you think and all it requires is asking the right questions and being well versed in the nuances of the Tax Deferred 1031 Exchange.
The Power of the 1031 Exchange
Article 1031 of the Internal Revenue tax code provides the opportunity to defer the payment of capital gains taxes when an investment property owner disposes of one investment property and uses the proceeds to purchase another investment property. The opportunity not only allows for deferment of capital gains taxes, but it also provides for diversification of their portfolio, possible increase of cash flow and the building of multi-generational wealth.
The Role of You, The Broker
An integral part of this entire process is to position yourself as their trusted advisor who offers up solutions that go way beyond just listing a property for sale, then completing a transaction; any broker can do that. Before you broach the subject of an exchange, make sure you are completely up to speed with the nuances of the 1031 exchange. Here’s how you maximize your role:
- Educate Early
Get good at introducing the idea of exchanging to them early on with your initial consultations. By educating them early, you are laying the groundwork for more informed decision making when the time comes to list the property.
- Build Your Sphere
Build relationships with accommodators (QIs), CPAs, tax and real estate attorneys who specialize in 1031 exchanges. These relationships will assist you in being the go-to expert and allow you to offer a full-service experience to your clients, thereby increasing their confidence in you, the process and easily turning one sale into two transactions.
- Keep Up on All Market and Property Type Trends
Your ability to advise clients on the best replacement properties hinges on your knowledge of the market. Keep up to date with up-and-coming markets, interest rate trends and property types that align with your client’s goals. Honing these skills will make the difference between a good deal and a great one.
Asking The Right Questions
The road to turning one investment property sale into two starts with understanding your client’s motivation for selling, their short and long term investment goals and their concerns about any possible tax implications. I will say right here and now that you should never give any tax or legal advice and that you should always recommend that your clients speak to their CPA, financial advisors and tax attorney. Having said that, there’s nothing wrong with asking questions and the first one you should ask is:
- What are your plans after the sale? This will let you know, up front, if they plan to reinvest or to use the cash for other purposes. If the answer is to cash out, then you move to question #2. If the answer is to reinvest then they’ve opened the door to sharing the power of the 1031 exchange. If they say no to an exchange, it is imperative you ask “Why?”, because they may be saying no for the wrong reasons – they think they have to buy the same, “like-kind”, type of property or advisors other than real estate professionals have told them to “just pay the tax” due to investment property being too management intensive or some other inaccurate fallacy. Either way, these questions will undoubtedly show your clients that you are looking out for their financial well-being, thereby illustrating yourself as a true advisor versus just another real estate broker.
- Are you aware of the tax implications of selling this property? You would be surprised to learn how many property owners have no clue as to how capital gains are calculated, nor how much they may owe upon disposal of an investment property that they’ve made a profit on.
- What are your long-term investment goals? This question allows you to position the 1031 exchange as a strategic tool that aligns with your clients’ broader financial objectives, whether they are looking to diversify, consolidate, or increase cash flow.
Having the Right Answers
Now that you’ve opened the door to having a discussion by asking the right questions, you must be able to provide accurate and compelling answers. Your knowledge and confidence in the exchange process and its benefits will make the difference between a single sale or a double transaction.
- Articulate the benefits
Clearly the main benefit is the deferment of the capital gains taxes, however, the remaining benefits are just as powerful! Leveraging their position to expand their financial growth, acquiring a more lucrative property, portfolio diversification or less management responsibilities thereby adding to the quality of their life.
- Demystify the process
This is actually more important than explaining the benefits because most people know little to nothing about the 1031 exchange. In most cases you’ll find that what they think they know is either false, misinformation or myth. You may remember I mentioned earlier about asking ‘why?” when they say “no” because their answer may also be due to misinformation or belief in a myth, like thinking they have to buy another apartment when they sell their existing apartment because they are about to do a “like-kind” exchange. Break it down for them in bite sized steps. Sell, identify replacement property in 45 days, close in a total of 180 days. Acknowledge to them that they are doing everything right by talking to you now, before their subject property even goes on the market.
- Highlight the flexibilities
Educate them that “like-kind”
simply means investment property for investment property. Make their day by letting them know that they have multiple options to exchange into, including complete hands-off opportunities that may bring higher yields and a better quality of life.
People Love Success Stories
Nothing is quite as persuasive as sharing a story of a success of someone they can relate to; someone who is in the same boat as they are. Sometimes the best proof is social proof. These stories will not only highlight the benefits, but also show you as an advisor who truly has their client’s best interest in mind. This step will also help your clients see what’s possible for them, thereby feeling more confident in exploring this strategy.
Overcoming The Objections
You will find that many clients may hesitate and even have reservations about moving forward with an exchange due to their own misconceptions or perceived complexities about the process. It is crucial to address these concerns head-on as being able to calm their anxiety can turn a skeptical client into a confident one.
“It’s too complicated”
The first step is to simplify the process for them, assuring them again that they are doing the right thing by talking about and ultimately planning their exchange early, before they sell their “downleg” (relinquished) property. Emphasize that you and your team of professionals are there to walk them through the process, step by step, ensuring a smooth transaction.
“I’m worried we won’t find a good replacement property”
Assure them that their options are vast, and with your expertise, market knowledge and network, finding the right replacement property for them is easily achievable. Emphasize your commitment to finding a property that not only meets all requirements but also aligns with their goals.
“There’s just not enough time”
The 45 Day identification period can be daunting, especially if there have been no conversations about their options and goals. Remind them that by having these conversations early and even sharing current product availability, the chances are very good that they will have options at the ready even before the identification period even starts.
Turning one transaction into two is not just a possibility, it’s a strategic approach that can significantly benefit both you and your clients. Positioning yourself as a knowledgeable advisor then asking the right questions and providing the right answers, you can unlock the full potential and power of the 1031 exchange. This not only enhances your clients’ financial objectives, but also doubles your opportunities for business, establishing you as a broker who goes above and beyond the typical needs of a seller. Mastering the art of the 1031 exchange is more than just understanding tax deferral; it’s about recognizing and seizing the opportunities that lie within each transaction, ultimately turning a single sale into a foundation for long-term client relationships and business growth.
We Are to Help!
If you are an investment property owner who is interested in a no obligation, private consultation, please visit www.Best1031Online.com, or contact James Bean
of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031
or email at [email protected].
If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!
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All information is deemed to be accurate and is not tax or legal advice. All investors/taxpayers should consult their CPA, tax attorney and investment advisors.