Everyone and their Uncle Bobby wants a tried and true formula so they know when to make their next move. Often, one of the choices to be made is whether to keep the property(s) or not. If the decision is made to move forward in an effort to enhance their investment agenda, the next topic for discussion will, or should be how and through what structure are they gonna move forward? Surely the so-called formula doesn’t include a miracle. The miracle to which I allude, would be a formless voice arising from your analysis sheet.
Are there formulas designed for real estate investors to figure out whether to exchange or not? Yep. Do they do the job? Eh. Here’s the problem. I stopped counting the exchanges I’ve done when I hit a couple hundred, and the analysis for each one was indeed designed to assist in that single decision. No matter what though, there are choices to make almost every time. I’d say the 80/20 rule probably applies. 20% of the time the analysis pretty much screams which decision makes the most sense. Even then, sometimes there are subjective factors for which the analysis is simply not equipped to handle.
It’s called life. You’ve seen the bumper stickers, right? It happens. 
I’ve structured transactions which included tax free cash to my client; installment sale treatment; boot was received; (cash or other property received by taxpayer, debt relief, etc. in an exchange which is taxable) and threw in a hypothecated note just for giggles. How often will a real estate investor incorporate all those techniques in one transaction? I dunno. I’ve only done it twice. But both times it was the right thing, (things?) to do. The decision to incorporate more than one technique flowed naturally from the client’s Purposeful Plan.
It’s an entirely different post, but pretty soon I’ll write about what generated the transaction’s structure.
Back to the formula for when to exchange.
Beginners are sometimes easily recognized ‘cuz they want the analysis of their current status to clearly indicate exactly what they should be doing, and how it should all be executed. I can relate. I wanna be 6′ 2″ and weigh a lean and sinewy 190, but that ain’t gonna happen either.
Does that mean analysis merely makes a messy picture less muddy? That’s not what I’m sayin’. When properly done, and far more importantly, when correctly interpreted, analysis tends to focus the issues at hand like a laser beam.
Sometime it says the decision to execute a tax deferred exchange would result in margin benefits. Our policy since Day 1 has been to advise clients to do nothing if objective analysis indicates only marginal benefits for one action or another. The idea is to stay on No-Brainer Highway. Find yerself to far from that road and your decisions will begin to morph into guesses. If you’ve been payin’ close attention, you know I don’t call it Purposeful Guessing. I much prefer the luxury of sayin’ “It’s a No-Brainer.”
This’ll surprise some, but many times I’ve advised clients to eschew a 1031 and pay the taxes. Sometimes the big picture will indicate that as the better way to go. There are many reasons, but it’s almost always the analysis that leads to the final call.
Still, the vast majority of the time, subjective factors have an impact. Life happens.
The #1 formula for 1031 decision making doesn’t exist. What makes sense for one investor would cause another to veer into a slightly difference direction. Numbers are objective beings who couldn’t care less about what you do based upon the conclusions to which they lead you.
At the beginning of our relationship with a new client, we make a short declaration of policy.
It’s our job to give brutally objective advice based upon conclusions drawn from cold analysis, executed without bias. The subjective is to be added into the mix by the client. We call it seasoning for lack of a better analogy. And though our advise is never given lightly, we always make it crystal clear — it’s their money, their final call.
So here’s the thing. Why haven’t we talked yet? Come on now, there’s not a reason in the world we shouldn’t have had at least a short conversation by now, is there? Find me, and we’ll connect one way or another. Meanwhile, have a good one.
Related posts:
- Is It Always Advisable To Execute A Tax Deferred Exchange?
- Section 1031 Of The IRC – The Tax Deferred Exchange — Not Always The Right Tool
- How A Purposeful Plan Makes Use Of A Partial 1031 Tax Deferred Exchange — A Case Study
- Easter Island Has No Statue Honoring 1031 Tax Deferred Exchanges
- Tax Deferred Exchange With a Twist — How Purposeful Planning Makes a Difference
About BawldGuy
What an obvious, yet not so obvious truth. Sometimes common sense is apparent to those with wisdom, however too many get caught up in the details and can not see the forest through the trees. Love this subtle yet powerful post!!!
Thanks Tony — There’s always been either a cloak of mystery surrounding 1031′s, or worse, some think it’s been sent from the Lord as the be all end all.
Readers: Wanna find out pretty much anything and everything ’bout mortgages and the industry? Click on Mortgage Cicerone and tell them I sent you.
Thanks for the vote of confidence, however in all seriousness, your site and advice is ROCK SOLID!!!!!!
Much appreciated Big Guy.
I don’t get the 1031 mystique. Unless you do it wrong, or you don’t read the rules or you have a lousy QI or you do a reverse 1031, you oughta be able to keep the deal in the no-brainer mode. And as usual, Jeff, you’re dead solid on.
And believe you me: I’ve seen some 1031s that should have been done but weren’t for the craziest of reasons, and I’ve seen 1031s that made absolutely no business sense whatsoever.
P.S. You think we’re gonna see — rightly or wrongly — a boatload of 1031s in 2009 if BHO is elected?
David — Last year I was called in just in time to halt a 1031 for a referral who had mountains of capital gains offsetting depreciation on the shelf. He ended up paying single digit % taxes, and was able to start with a brand new basis.
So far, I’m viewing this election as an almost eery repeat of 1980. Investors were not only in a bad way due to wicked high interest rates, 13-17%, but the correction made that factor moot. It was brutal.
It’s all about perception, and BHO, rightly or wrongly is perceived as wanting to tax both business and investment. When that perception is acted upon by investors, they tend to go for cash, or simply hold still. The only reason they’d execute a 1031 would be to increase either cash flow and/or tax shelter.
What some do, the real believers, is to sell, pay the taxes, and horde the cash. They do this in anticipation of bad economic times nationally. The last time I saw this was when Clinton was running for his first term.
The extreme fears turned out to be baseless for a variety of reasons. The possible difference this time around is the possibility a White House wanting to raise taxes on business and investors, with a willing Congress.
I don’t see a rash of 1031′s if BHO is elected. There will be, however, increased market activity. Unfortunately, as I said earlier, it’ll be perception that rules the day.