When advisors and their clients contemplate a potential Section 1031 exchange, the main goal is to determine the amount of income taxes to be avoided in the year of sale and then later look at the fundamental mechanics of the purchase and sale transactions. However, there are many other factors that need to be explored as well.
Determine the overall business objectives sought by the client. Many times the non-tax objectives are more important than the tax objectives and it is important to explore with the client the overall objectives to fit those into the transaction.
Consider the overall long-term costs of the transaction. In addition to income taxes in the year of sale, there are other financial costs that need to be considered including: depreciation recapture, alternative minimum tax, expiring net operating losses, passive activity losses, interest, principal payments on debt, tax rate changes and loss of depreciation.
Provide customized tax strategies. Many times there may be better ways to accomplish the client's goal, including different types of exchanges discussed in our newsletters such as reverse, construction and long-term development exchanges.
Provide continuous monitoring of the Section 1031 exchange. A fundamental value to any exchange is continuous monitoring and tax analysis to ensure that no action is taken that may cause the transaction to be inadvertently taxed or disqualified. Most firms do not have the specialized tax expertise to analyze suggested changes to the transaction.
Safeguard exchange funds. Surprisingly, despite the availability of qualified escrow accounts, many exchange companies still combine their funds in pooled accounts subject to claims of creditors.
Provide IRS audit protection. Tax opinions by Board Certified tax attorneys and detailed tax work papers provide tax penalty protection and acceptance by the IRS of the Section 1031 exchanges.
Use Section 1031 exchanges to provide Strategic Growth for your Firm. Become a member of SPEX Alliance, a Section 1031 Exchange Company owned solely by its professional member firms. Members may offer Section 1031 exchange services to its clients and earn fee income. SPEX provides complete exchange management services and E&O coverage for the SPEX Alliance.