BawldGuy Note: Cuz Max Whitmore’s computer needs are so rare, (some pretty intense and sophisticated software/analysis) he’ll be unable to post until the specially designed machine he’s ordered is delivered, probably by this Friday. (Fingers/Toes crossed.) Which leads us to:
BawldGuy Axiom: When life is boiled down to its essence, logistics rule us all. 
Max and I thank you for your patience.
This conversation happens a few times a year. Got a call recently from a very nice house agent, who was concerned one of her clients/friends was entering into a tax deferred exchange. I asked why the concern? Doing an exchange is common, just do ‘em right. Apparently the transaction was being done as a result of the advice of a recently retained local accountant. She’d feel better if I’d talk with them — would I please humor her? Not a problem.
After the conversation with her investor buddy, it became obvious she had an immediate, but unknown (to her) option, which could be easily executed. But a much larger problem than that was systemic. Her tax pro was allowing her to enter into a classic, down the middle of the road, delayed exchange when there was another obviously superior way to go.
In a nutshell, the investor had an impressive amount of unused depreciation — sufficient to offset a pretty impressive hunk of the capital gain she was deferring. In plain English? She’d be able to take out over half of her net proceeds in cash — without ever paying capital gains taxes. She’d accumulated bunches of unused depreciation as a result of being barred from using any of it against her ordinary income. (read: job income — it was over $200,000) Hence, all the unused tax shelter.
By executing a tax deferred exchange (1031) sans the huge tax free cash exit, she’d have been penalizing herself. See, whether she does it using the original plan, or my way, she’ll end up with the same properties when all is said and done. What she will gain using my approach will be significantly more future tax shelter. That’s a huge deal in the long haul. It’ll result in an even larger offset for her next capital gain. We’re not talking nickels and dimes here.
Note: If she’d wanted to simply take the money and run, she could have. There’s no requirement to buy more property when you’ve exited cash which has been offset by either capital losses or unused depreciation.
So if she’d gone ahead with her tax guy’s original advice, she’d of cost herself, give or take, $50-100,000 in bypassed capital gains taxes the next time around. And all ‘cuz her tax adviser wasn’t versed in the part of the IRC (Internal Revenue Code) dealing with this issue. It’s ain’t rocket science ’till you don’t know about it. (Famous quote from Captain Obvious.)
This is serious stuff people. We tend to treat tax guys, even CPA’s, like doctors. Yet, like doctors, in my opinion it’s grossly unfair to saddle your tax guy with the weight of knowing the entire body of tax law. More clearly put — you wouldn’t ask your wife’s gynecologist to repair your heart valve. Yet we consistently expect our tax people to magically know everything about everything. It’s not fair to them, and it’s a potential disaster for the real estate investor.
Why?
‘Cuz it’s almost never the answers to questions that cause the problem. It’s the questions you don’t know to ask that find you jumpin’ out of a perfectly good plane without a ‘chute.
A quick call to my tax dude (currently busier than a one-legged man in a butt kickin’ contest), had him agreeing with my assessment — and the proper actions to follow. I then initiated a quick conference call, which made everything all better. I owe my guy a steak dinner — and I don’t mean Denny’s either. It’ll involve cloth napkins, real silverware, and heavily armed plastic.
How many real estate investors out there are blithely following tax advice often totally outa whack with their best interests, or worse, outright injurious? I see it on a semi-regular basis. Heck, my own guy has to ‘get back’ to me sometimes — and he knows real estate like Grandma knew muffins.
And for the record? Using a real estate agent who is not a full time investment type is an even faster route to nasty tax time surprises. I’d tell you the stories, but they’d sound so dang stoopid you wouldn’t believe ‘em. Several times accountants have taken me to task for even bringing up the subject — no kiddin’. Then, when the facts are clearly contrary to their advice, things change.
Your retirement and it’s income is simply too important not to have real pros on your team. Brown and Brown’s team is, (he says, foregoing any false modesty) an all-star squad. If we think your attorney or tax adviser may be a little mismatched for what your Purposeful Plan requires, we get you to someone who knows the answers to questions you simply don’t know to ask.
Doing things on Purpose is what keeps most folks far from the cliff’s edge. Let’s start a conversation about how close you may be to your retirement. Send me your contact info using the Contact BawldGuy whatsit and we’ll figure out what’s possible. It’s all about making the right decisions. Or, you can call me at 619 889-7100. Have a good one.
Related posts:
- How Real Estate Investors Get It Done – Tax Strategy
- Adjusted Basis: It Ain’t Just ‘Buy Low & Sell High’ For Real Estate Investors
- For Many Real Estate Investors Losses Can Be Golden — If You Act
- The Questions Many Real Estate Investors Simply Don’t Know To Ask
- Real Estate Investors – IRS Rules – Surprise Capital Gains
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