What is a 1031 Tax Exchange
IRS sign on headquarter building
What is the 1031 Tax Exchange?
A 1031 tax exchange is an IRS tax law which allows investors a deferral from paying taxes on capital gains when a real estate property is exchanged for another (similar) real estate asset.
To proceed with a 1031 tax exchange, the transaction must be handled delicately as there are tax implications, time frames and other rules that apply to such an investment swap.
Client Challenge: A Complex Transaction
In 2006, a client approached REMCO’s founder, Lisa Gerard, wanting to sell the largest asset in his portfolio and take advantage of a 1031 tax exchange. Lisa assisted in the sale of the asset at a significant price, and therefore identified not one but three new assets to purchase with the proceeds.
This acquisition project required organization and sequencing as all three assets were under different ownership and were being secured simultaneously.
In this case, the client ended up hiring Lisa to handle the entirety of the transactions involved, from due diligence to the related acquisition financing and other closing items.
Downtown West Palm Beach
Three Simultaneous Due Diligence Projects
In initial due diligence steps on behalf of her client, Lisa identified the existing financing details for each of the three desired assets:
One asset located in her client’s hometown was financed through a local bank
One out-of-state asset required assuming a conduit loan
One out-of-state asset required financing a new conduit loan
Lisa abstracted all leases, prepped internal rent rolls and expense rolls, interviewed tenants, property managers and leasing agents, handled three sets of third party reports, liaised between buyer, seller and lender lawyers and more.
Ensuring a smooth process for complex transactions requires organized documentation, such as a master due diligence checklist and contact list.
The Post-Due Diligence and Closing Period
Towards the end of a due diligence period, conversations are still best handled delicately. A strategic approach is to cautiously demonstrate interest, so that the buyer still has the opportunity to negotiate with the seller.
In the case of Lisa’s client, she helped maintain a balanced display of interest with the sellers and was therefore able to negotiate a commercially reasonable discount for her buyer.
In addition, Lisa helped her client transition into a smooth ownership by preparing and managing closing checklists, handling staffing and tenant leasing introductions and educating the owner’s staff on all newly acquired assets.
By the end of the 1031 tax exchange transaction, the investor secured all three assets of interest and was able to hit the ground running right away.
