#1 Formula For Knowin’ When To Execute A Tax Deferred (1031) Exchange

Posted @ 11:43 pm - Filed under 1031 Exchanges, Purposeful Planning, Selling Income Property, Investment Lessons, RE Investment Practice

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.

This entry was posted on Wednesday, August 20th, 2008 at 11:43 pm and is filed under 1031 Exchanges, Purposeful Planning, Selling Income Property, Investment Lessons, RE Investment Practice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.