Real Estate Agents Value-Add with 1031 Exchanges

Did you know that there are over 1.46 million real estate agents in the US? Among the sea of potential agents, it can be challenging to find ways to stand out.

Client satisfaction is one of the main ways real estate agents can distinguish themselves from the rest. Who doesn’t love when a deal finishes and all parties are happy? 

While there are many ways to provide client satisfaction, a large way to improve the client experience is through the knowledge that you bring to your interactions. Through licensure, training, and on-the-job experience, there are plenty of ways to acquire knowledge that will improve your client’s experience. Likewise, there are plenty of details in the real estate world that can get overlooked.

We recently sat down with Megan Destito, founder of Southern California Exchange Services (SCES 1031), to talk about tips for realtors looking to bring value to current and future landlord clients. An often overlooked way to bring that value to their clients is providing the client with information about using 1031 like-kind exchanges. Destito admits, “a lot of the agents, [especially] the newer ones, are the ones who are confused about the ins and outs of 1031 exchanges.” Destito explains that if a realtor could provide better information on how a 1031 exchange can help their client with their taxes, the agent would be providing a better client experience.

What is a 1031 exchange?

Destito breaks down the principles of a 1031 exchange for realtors. She explains, “A 1031 tax-deferred exchange is a tax wealth-building strategy for owners of investment properties. How it works: If you were to sell an investment property, you can defer paying the capital gains tax on that investment property as long as you buy another investment property. They call it ‘like-kind’, that’s [a property] equal or greater in value. 

“The ideal…exchange is an ‘all or nothing transaction’, [but] you don’t have to defer 100% of the capital gains tax. You can still defer a portion and still receive a benefit. But that’s in a nutshell what a 1031 exchange is.”

How can a realtor talk about 1031 Exchanges?

Destito shares an easy method for realtors to know if their clients would qualify for a 1031 exchange. Destito explains, “If you are going to a listing, you need to ask the question whether or not this is where they live or if this is an investment property. And if they say, ‘no, we rent this property out’, then the next question is, ‘are you going to do a 1031 tax-deferred exchange?’–and that’s it.”

Doing so opens the door for a conversation to happen about 1031 exchanges.

Next step: Provide a Guide

If your landlord client does want to learn more about a 1031 exchange option, a savvy real estate agent will enhance client satisfaction by providing a guide for them through the process. A guide in this situation is called a Qualified Intermediary (QI). QI’s are essential in the 1031 process. Destito explains, “In order for the client to defer the capital gains tax, they cannot have access or touch that money at all. And the person that’s doing that can’t be related to them in one iota. So it has to be a completely neutral third-party person at arm’s length to do that.” A QI’s role is to hold funds for you in a secure escrow account until you are ready to make your purchase. Once you’ve identified [a property], they will go through all of the legal paperwork and then direct the funds to where they need to go. Additionally, QI’s are unique because they are not bound by state lines and can operate nationwide.

Knowledge is power

Undoubtedly, client satisfaction will increase with the knowledge that real estate agents provide to clients about 1031 exchanges. Destito closes by saying that landlords “just want to know how can I save a buck? How can I save money here? Everybody wants to save a dollar. Right?… A lot of them don’t know about this tool, [and] that would be a benefit.”

For a full listen to the conversation with Megan Destito, you can listen to her guest appearance on the Millcreek Commercial Commercial Connection podcast episode.