1031 Exchange Consulting: A Component Solution for the Tax Planning Professional

The Emergence of the Strategic Advisor

As the tax landscape evolves, more CPAs are shifting their focus to providing advisory services. With their deep understanding of clients' financial situations and the intricacies of the tax code, CPAs are uniquely positioned to offer valuable insights and guidance to their clients. Tax planning and strategic advisory is driving a new generation of entrepreneurs looking for the right complement of solutions to deliver more comprehensive advisory solutions and value across their client base.

1031 Exchange or Like-Kind Exchange

A 1031 Exchange, also known as a Like Kind Exchange, allows individuals to defer paying capital gains tax on the sale of a business or investment property by reinvesting the proceeds in other real estate. This type of exchange is defined by Internal Revenue Code (IRC) Section 1031. Colloquially, 1031 Exchanges are referred to by various names such as Delayed Exchange, Section 1031 Exchange, Like-Kind Exchange, Tax-Free Exchange, Real Estate Exchange, Real Property Exchange, Starker Exchange, Tax Deferred Exchange, Real Estate Swap, Forward Exchange, and Simultaneous Exchange.

Engaging in a 1031 Tax Deferred Exchange provides taxpayers with a significant opportunity to build wealth and save on taxes. Through this process, the taxpayer, also known as the Exchanger, can sell investment or business-use assets, acquire Replacement Property, and defer the capital gains tax that would typically be owed upon the sale. 1031 Exchanges have been a part of the tax code since 1921, allowing taxpayers to exchange business-use or investment assets for other like-kind assets without recognizing taxable gain on the sale of the original assets. This defers the taxes that would have been due from the sale. 

Complexities Abound

As 1031 consultants, we know the exchange life cycle is more akin to a marathon rather than a sprint. Meaning, consulting on a 1031 exchange involves planning and preparation with a multitude of key advisors and can often take months to accomplish the key goals set forth in the planning process. Every exchange tends to be unique, driven by the goals and objectives of the exchanger. The role of preplanning and strategic think ing needs to occur early in the process and be driven by team-based planning involving the tax advisor and investment advisor. Careful navigation of 1031 timelines and replacement property options are essential to achieving optimal outcome. Most CPAs, or RIAs for that matter, are equipped to manage the process or have the depth of in-house expertise to facilitate all aspects of the exchange process. With an abundance of investment options qualifying as "like-kind," bridging the gap between tax planning and investment execution becomes critical.

An Opportunity for Strategic Thinking and Tax-Planning

We see more tax-planning professionals partnering to deliver 1031 solutions to clients. Providing 1031 exchange solutions offers another point of engagement for CPAs with clients that own investment real estate. The strategic thinking and preplanning typically starts well before the contemplated listing of the replacement property. Assessment of how the property is held, current property return profile, current property valuation, in-place debt, and alternative replacement options provide an opportunity for the CPA or tax-advisor to shine as a strategic thinker and implement a team-based approach to solve key issues in the exchange life cycle. We see continued growth in strategic 1031 exchanges as exchangers evaluate replacement property options that span both passive and active ownership options, may provide options for equity refinancing, or offer a superior return profile than the currently held investment property. For example, we have seen business owners leverage both 1031 exchange and opportunity zones in the sale of a business. Business owners can also facilitate a 1031 exchange and refinance the replacement property to generate funds where a cost of capital arbitrage is present. As complexities grow, so does the opportunity for the CPA to provide that vision for business growth and strategic direction.

The Intersection of Tax Planning and Investments

Having a sound plan is essential, but access to quality investment options is critical. The exchange timeline is extremely strict, with a typical forward exchange allowing 45 days from the sale date to identify a replacement property(ies), and 180 days from the sale date to close. Timelines coupled with I.D. rules means that planning for the ultimate investment in replacement property needs to be carefully coordinated. Finding the right mix of properties to identify can mean the difference between a successful exchange and a failed exchange. Hence, having a team in place that can act in a product and be sponsor agnostic is very important. What do we mean by product agnostic? Simply stated, there are replacement property options that are considered securities, and sold by a licensed securities professional, and there a re replacement options that a re sold by licensed real estate agents. It is important to let the client's goals and objectives drive the decision-making, so working with a team that puts client outcomes first is imperative. Leveraging investment vehicles like a Delaware Statutory Trust as an insurance I.D. takes team coordination and transparency in the process. For larger exchanges, more custom solutions can be brought to bear with the right team in place. Custom solutions can include partnering with a real estate sponsor on an acquisition. It could also include build-to-suit or improvement exchanges. Bringing a comparative approach by looking at strategic options side-by-side can bring clarity to the decision-making process. Whatever the goal is, access to resources and expertise is critical, and specialization in products and solutions matters.

Conclusion

The race to deliver solutions in the advisory centric model is on. Whether you are a CPA or RIA, finding the right solution that acts as a steward of your brand and drives client satisfaction becomes essential. As a solution, 1031 Exchange complements a multitude of strategies many CPAs and Tax Specialists already offer to their clients, like cost-segregation. If you know your client owns investment real estate, socializing 1031 Exchange capabilities becomes a natural business extension.

For more insights into strategic tax planning solutions and how RCX Capital can help you navigate complex 1031 exchanges, visit RCX Capital Group and explore their comprehensive advisory services.