If you
are a real estate agent, having a strong understanding of how tax law works
in regards to real estate can be of tremendous benefit to both you and your
clients. Spotting opportunities to take full advantage of the tax breaks
within the Internal Revenue Code will lead to more commissions and reduced tax
bills for clients. An example follows:
Agent Smith and Agent Jones are competing
for a $1MM listing. The client is an elderly couple who have lived in the
home for 30+ years and are looking
to 'downsize' to a smaller residence now that the kids have grown up and
moved away.
Agent Smith prepares a compelling
listing presentation full of comparables and highlights his proven track record
of getting properties sold quickly and for top dollar. Agent Smith is
smooth and the focus of the presentation is on getting top dollar for the
clients as quickly as possible.
Agent Jones takes a different
tact. Agent Jones notices that the clients purchased the property for
$100K thirty plus years ago. Agent
Jones points out that the sale of the property at $1MM will result
in a tax liability of approximately $100K, even after accounting for the
Homeowners Exemption. Agent Jones suggest two options:
1. Sell today and pay $100K in taxes.
2. Defer the sale 16 months and pay
$0 in taxes
Agent Jones is sure to let the
clients know that if they choose option #1, as a good agent, she will be able
to get top dollar for the property in a reasonable amount of time. However,
Agent Jones highlights the strategy behind option #2.
Option #2
Explained
The couple moves out of the $1MM property
and converts the property to a rental.
After 16 months the property has been established as a rental and can
qualify for a 1031 Exchange. However since the property was also a primary
for two of the past five years, the property will also qualify for the
Homeowners Exemption. Of the $900K gain
in the property, the first $500K will be tax free due to the Homeowners
Exemption, the excess $400K gain will be tax deferred due to the 1031 Exchange.
Several steps must be taken to put
Option #2 into play:
- The couple must move out. Agent Jones is happy to act as a buyers
agent and help the couple purchase a new primary residence.
- The couple must rent out the $1M home. Agent Jones is also more than happy to
help find a tenant for the property.
- After 16 months Agent Jones will need to list the
$1MM property.
- Once the $1M property sells, the couple will need to
purchase replacement property to complete the 1031
Exchange. Agent Jones is happy to
act, again, as a buyers agent for the couple.
Agent Jones may face some
objections to Strategy #2. The most common are:
- The couple does not want to act as a landlord for the
16 months the home is rented.
- The couple does not want the hassles of owning rental
property in the future.
The first objection can be easily overcome
by Agent Jones with an introduction to a competent property manager.
The second objection can possibly be
overcome by Agent Jones introducing the couple to rental property that is
hassle free. For example, the couple can acquire a commercial Tenant in Common
that requires absolutely no management.
They can also consider a NNN property, such as a Walgreens. Also, if the couple would like to own
vacation property in a resort town, this is an ideal way in which to acquire
it.
If the couple chooses Agent Jones
as their Realtor and chooses option #2,
the clients will save $100,000 in taxes. In addition, Agent Jones is paid a
minimum of three times:
-When the couple buys their new primary residence
-When the couple sells the $1MM property
-When the couple purchases their
1031 Exchange property.
In this scenario, everyone wins.
If you would like to discuss the strategy discussed in this article, please do not hesitate to contact Asset Exchange Company at 877-471-1031.
Asset Exchange Company - Your Exchange Accommodator
