How to Double Your Commissions with 1031 Exchanges.
Yes, it’s true. You can use 1031 Exchanges to double (or more) your commissions. Read how it’s done below.
Introduction to 1031 Exchanges
Table of Contents
Internal Revenue Code Section 1031 allows taxpayers to sell any type of business or investment real property and use the sales proceeds to purchase any other type of business or investment real properties.
This allows the taxpayer to defer paying all taxes!
More requirements exist.
Equal or Greater Value, Debt, and Equity
- The replacement properties when added up must be of equal or greater value than the one sold.
- In addition, the equity in the replacement properties must be equal to or greater than the property sold.
- Also, the debt in the replacement properties must be equal to or greater than the property sold.
Seems confusing, but real estate investors understand and easily follow these requirements.
Timing Requirements for Identifying and Purchasing Replacement Properties
1031 Exchanges also require identifying potential replacement properties within 45 days of the sale closing; and
Within 180 days from the closing of the sale to finish purchasing the replacement properties.
45 Day Rule: Identifying potential replacement properties entails preparing a list of candidates by address or legal description. The seller signs and dates the list and keeps it if the IRS ever asks for it. 1031 experts recommend either notarizing the list or a witness (such as yourself) signs the list to prove satisfaction of the rule.
1031 Intermediaries Requirement
Sellers cannot control the sales proceeds. They must use a “Qualified Intermediary” to hold the funds and use them to pay for the replacement properties.
That’s why the term “Exchange” exists. In essence, the taxpayer exchanges qualified real properties for others.
Many 1031 Exchange Intermediaries do business across the country. Usually, title companies and attorneys act as intermediaries for a small fee.
Done correctly, the income taxes on the gains become deferred until the taxpayer finishes with exchanging and pockets the sales proceeds. Then, the taxpayer pays the deferred taxes.
The Types of Properties Qualified for 1031 Exchanges
As mentioned above, any type of business or investment properties qualifies for a 1031 Exchange.
Business properties include any type of real properties used for a business. Examples include:
- Gas stations;
- Grocery or retail stores;
- Shopping malls;
- Hotel and motels;
- Apartment buildings; and
- Entertainment centers.
Investment properties include any properties held for investment purposes such as:
- Raw land;
- Homes and condo units held for profit;
- Commercial or industrial buildings in upcoming areas held for profit when sold.
Mix and Match: Some people mistakenly believe when selling raw land only raw land replaces it. In reality, a taxpayer selling raw land can purchase all types of business or investment properties. For example, the replacement properties could include:
- Business locales;
- Houses or condo units to lease;
- Rental storage facilities;
- Pay by the usage parking lots;
- Movie theaters;
- Grocery stores;
- Commercial office units.
The list goes on.
The same principal applies to mixing all types of business with investment properties. For instance, sell a warehouse and buy a hotel. Or, sell an apartment building and buy raw land along with a commercial condo unit and a gas station.
Real Estate Agents Can Double Commissions with 1031 Exchanges
Besides helping your real estate investment clients defer their taxes, you can double your commissions.
1. Look at every 1031 Exchange as an opportunity to make a sale and a quick purchase. That’s because every 1031 sale must complete the tax deferral process by closing on purchasing one or more replacement properties within 180 days.
In other words, for every sale, there must be a purchase within six months.
2. Collect your first commission upon the sale. Then, collect your second commission when your seller makes the required purchase. Better yet, make three commissions if your seller buys two properties.
Double Your Commissions with 1031 Exchanges Strategy
This means when you get a listing for 1031 qualified properties you need to ask your seller if he or she wants to do a 1031 Exchange. If the answer is “Yes” you need to ask what types of replacement properties interest the seller.
Once you know what your seller wants to buy after the sale you can search for them.
Bear in mind, the clock starts ticking on the day the sale closes. Your seller must sign and date a list of replacement property candidates by the 45th day. Or, lose the entire tax deferral. Also, remember that the seller must complete the purchase of one or more of the properties on that list by the 180th day from the closing.
Now you have the best of both worlds! A seller anxious to become a buyer in a short time. Earn a commission on the sale. Earn another commission on the purchase. Plus, earn more commissions if the sales proceeds buy more properties.
Anatomy of a 1031 Exchange
The framework of a 1031 Exchange involves the following four scenarios:
I. Two Transactions
Every 1031 Exchange requires the purchase of at least one replacement property.
You earn two commissions – one upon the sale and another with the purchase.
II. Two or More Replacement Properties
Some sellers leverage their investments by diversifying their sales proceeds into many replacement properties.
For example, a seller decides to diversify the $1 million in a raw land sales proceeds into different types of investment properties. Instead of buying more raw land, the seller decides to buy a $500,000 duplex and a $100,000 commercial office unit, plus a $200,000 single family home to lease and $200,000 (or more) in a storage rental facility.
You just earned 5 commissions with the original sale and four purchases.
III. Make the Sellers of the Replacement Properties Your Clients
Things get even more fun when you approach the sellers of the replacement properties and ask them if they want to do a 1031 Exchange with their sales proceeds.
The cycle continues as you approach future sellers of replacement properties about 1031 Exchanges.
IV. Pricier Properties = Bigger Commissions
A big benefit of 1031 Exchanges occurs when the seller decides to purchase pricier properties.
For example, $1 million profits used to buy $3 million worth of replacement properties.
You earn a commission on the $1 million profits sale (maybe that was a $2 million sale with $1 million profit?) and then earn commissions on $3 million purchases.
Your New 1031 Exchange Agent Niche
Once you do enough 1031 Exchanges to feel confident answering clients questions you can create a new niche. “Your Name, 1031 Exchange Agent” sounds nice.
Clients happy with you become repeat clients as they continue doing 1031 Exchanges.
Also, find a 1031 Intermediary to work with for future exchanges. You will discover that 1031 Intermediaries may refer business to you as well.
Tips for Finding New Clients as a 1031 Exchange Agent
1. Approach any non-owner occupied property owner about considering a 1031 Exchange when eventually selling.
2. Listen to the owner’s investment objectives (more cash flow, more equity, more tax breaks, more real estate, etc.).
3. Don’t be pushy. Your first meeting is to learn about your prospective client’s long-term investment goals.
4. Then, find several suitable properties meeting their criteria.
5. Finally, arrange a second meeting to show them the properties. Explain how a 1031 Exchange preserves their equity while meeting their financial goals. Then, ask for the listing.
Besides Doubling Your Commissions with 1031 Exchanges
Why not keep more of the doubled commissions you earn with 1031 Exchanges by joining a 100% commission brokerage in the greater San Diego area?
We offer full 100% commissions with no hidden fees.
Contact Us to learn more about the benefits of a true 100% commission brokerage.
Steven Rich, MBA – Guest Blogger
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