Unlocking Tax Benefits with 1031 Exchanges: A Deep Dive with Jackie Meyer and Michael Scherer

In a recent episode of The Concierge CPA podcast, host Jackie Meyer, CPA, sat down with Michael Scherer, Senior Regional Vice President of RCX Capital Group, to explore one of the most powerful tax-saving strategies available to real estate investors: the 1031 exchange. Throughout the conversation, Scherer delved into the complexities and opportunities associated with 1031 exchanges, sharing insights on how tax professionals can help their clients maximize tax benefits through real estate strategies.

You can listen to the full episode here, or on your favorite podcast platform.

Understanding the 1031 Exchange and Why It Matters

A 1031 exchange is a section of the U.S. tax code that allows investors to defer capital gains taxes on the sale of an investment property, provided that they reinvest the proceeds in a “like-kind” property within a specific timeframe. This process offers a significant tax advantage for real estate investors, but as Scherer explains, the rules and procedures are far from simple.

“Every 1031 exchange is different,” Scherer noted. He highlighted that navigating the technicalities of the exchange requires thorough planning and attention to detail, particularly when coordinating with qualified intermediaries—an essential step in the process. If done correctly, the benefits can be substantial, allowing investors to defer capital gains taxes, preserve wealth, and reinvest in new properties. However, missing key steps, such as engaging a qualified intermediary to handle the proceeds, can disqualify an exchange and lead to costly tax consequences.

Identifying the Best 1031 Exchange Investments

For accountants and advisors looking to add value to their clients, 1031 exchanges offer a valuable service that can differentiate their practice. As more real estate investors explore strategies to defer taxes and grow their portfolios, Scherer emphasized the importance of understanding the best 1031 exchange investments. These investments can range from direct ownership in properties like single-family rentals to more passive options like Delaware Statutory Trusts (DSTs).

Scherer pointed out that DSTs are especially appealing to investors looking for a hands-off approach. “They allow for fractional ownership in institutional-quality real estate,” Scherer explained. “It’s professionally managed, and investors can diversify their portfolios with lower upfront capital.” While DSTs offer flexibility and professional management, it’s important to be aware of their limitations, such as lack of control over when the asset is sold.

Expanding Client Advisory Services with Real Estate Strategies

One of the major themes of the conversation was the shift from compliance-based services to advisory-focused roles for tax professionals. Scherer emphasized that tax professionals should consider expanding their services to include real estate strategies like 1031 exchanges. Real estate is a major wealth-building tool in the U.S., and accountants are uniquely positioned to guide clients through tax planning strategies that can optimize their real estate portfolios.

“Building a practice area around 1031 exchanges and tax-advantaged real estate solutions is critical for firm growth,” Scherer said. He encouraged tax advisors to ask their clients key questions about their real estate holdings and long-term investment plans to identify opportunities for tax deferral. With the best 1031 exchange investment options at their disposal, firms can offer significant value to high-net-worth clients, helping them preserve capital and reduce their tax liabilities.

Best Practices for Advisors Considering 1031 Exchange Investment Options

Scherer’s firm, RCX Capital Group, specializes in partnering with CPAs and financial advisors to help guide clients through the complexities of 1031 exchanges. He shared best practices for advisors looking to get started in this space:

1. Develop Partnerships: Scherer recommended partnering with qualified intermediaries and other professionals who specialize in 1031 exchanges. These partnerships ensure that clients receive the highest level of service while protecting the integrity of the exchange process.
   
   
2. Offer Objective, Product-Agnostic Solutions: It’s crucial to remain solution-agnostic, Scherer stressed. Advisors should present all available 1031 exchange investment options, whether that’s direct real estate investment, DSTs, or tenant-in-common arrangements, depending on the client’s goals.
   
   
3. Education and Communication: Advisors need to educate their clients about the benefits of 1031 exchanges while ensuring that clients fully understand their options. Scherer emphasized the importance of taking a collaborative approach, walking clients through the lifecycle of an exchange to ensure the best outcomes.

Prepare Your Firm for Future Growth

The podcast wrapped up with a forward-looking discussion on how the 1031 exchange landscape may evolve in the future. Scherer acknowledged that while there’s always talk of potential changes to tax regulations, the 1031 exchange remains a valuable tool for real estate investors.

For tax professionals looking to elevate their firm’s service offerings and provide more comprehensive tax planning, understanding and leveraging 1031 exchanges is a strategic move. By incorporating these real estate strategies into their advisory services, firms can differentiate themselves in the marketplace and drive greater client satisfaction.

Leveraging Technology to Grow Your Tax Firm

If you’re ready to take your tax advisory services to the next level, TaxPlanIQ can help. TaxPlanIQ is designed to simplify complex tax strategies, including 1031 exchanges, by providing curated tax strategies and easy-to-follow implementation steps. With just a few clicks, you can create custom-branded tax plans that showcase potential savings for your clients.

To see how TaxPlanIQ can transform your firm’s advisory services and help you grow your revenue, schedule a free demo today!