09.26.2001 :: Real Estate News
Why Aren't More Exchanges Happening?
by Rodney Fitzpatrick

Since 1921 the 1031 Tax Deferred Code has been in effect. This provision by our federal government is a "God Send" gift for investment property owners. Think of the tens of thousands of dollars a person can save on unnecessary taxes. Why in the world wouldn't they use it? Are they insane? Are there masochists out there who enjoy paying the government taxes? The simple fact is that every year real estate owners pay Billions of dollars in unnecessary taxes.

When one analyzes the situation the conclusion is clear that there are three primary reasons why real estate owners do not use the 1031 exchange provision. In brief we will look at those three areas, for all of them have a workable solution.

1. Education: People just don't know! Why? It is because it has remained a secret to the common taxpayer. For some reason there has been this mystery about exchanges and when mentioned people shy away from the conversation. Many people believe that exchanges are too difficult, that they would have to sacrifice their first born to perform the process. It is just not so. In fact, if done properly by a qualified intermediary most people are unaware that it has taken place due to the smoothness of the operation. They don't realize that while they are practicing their signature writing in the escrow process, that among those documentations are those containing the language and instructions to complete their deferment request. If I could steal a phrase, "It's as easy as pie". Although for some making pie these days is going to the local supermarket and buying the frozen variety. In all, it's still easy.
   When it comes to education we must not leave out the professionals. It is a sad commentary to say that many professionals do not know what they should do. They should at least have a workable knowledge of the potential benefits and consequences for their client. The recognition of an exchange potential should be as simple as smelling burnt toast in the kitchen or that unpleasant skunk perfume we are entertained with on our nations highways and roads. The point is. If it isn't the personal residence of someone then it is a potential exchange.
2. The Prospective Exchanger Needs Money : Sometimes a seller has a compelling need for the sale proceeds. There may be no choice, but the"price" of accessing this money will be to pay taxes. However, the exchange process is not "all or nothing." There are ways to access some money. The key is to examine what a client's true eeds may be and develop the appropriate strategy. If it is mandatory to access all the money, so be it. But if only some money is truly needed, then there are alternatives - positive tax alternatives.
3. Lack of Options For Landlords: Many real estate investors think of the drudgery of being an active landlord. Everything "Hands On." In most cases they want out of the game, because the benefits are not there. Every time unit 1-A has a plumbing problem the landlord says, "why couldn't I have listen to my mother and invest in uncle Louie's burger grill." Although the business has been around for eternity you are still consider to be a niece or nephew, the burgers are greasy and uncle Louie isn't giving you much of a return. What options do you have? One could either relinquish his title of being the landlord, sell his property and pay taxes; or investigate means to continue the role of landlord without the hassle. In the real estate industry the answer is clear. An investor can now purchase a percentage of fee simple interest in commercial projects that have nationally known credit tenants, Triple net Leasing, professional management, and double- digit returns. Ownership is totally passive. The owner gets a monthly check just like a CD or Bond. The "return" is very attractive and competitive, no land lording or management is necessary. Most of all that important equity is still intact.

In conclusion, the exchange process offers some great benefits. One can be flexible and creative with their tax strategy. It has been demonstrated that you don't have to be an expert in this field, just educated enough to recognize the opportunities and the potential. Remember if there is a remote chance that one may need to do an exchange, preserve that option by initiating the process in escrow. It is a small price to pay to be safe in light of the possible tax consequences that may be in store. One can always call off the exchange receive their money and simply pay the taxes if desired. As they say, "Education is the key."

Rodney is a Regional Vice President of Investment Advantage Group a provider of 1031 tax deferred exchange services and property tax solutions. As a member of the Federation of Exchange Accommodators Rodney and IAG provide traditional and innovative tax strategies for the investment property owners. You can call toll free at 888-212-1031, e-mail him at rodney@iag1031.com or find him on the web at www.iag1031.com.