Thursday, February 14, 2008

I beg you, PLEASE beware when doing 1031 tax-deferred exchanges

Hey people, here some news for you: be smart, and don't cheap out when doing your real estate deals. I'm saying this as a lawyer, of course, but it really is crucial sometimes. You want to really blow a deal? You can, and the fault will all be yours.

Case in point: the one and only Bawld Guy and I had a lengthy conversation about 1031s today and a conundrum of one of his clients. You can read about his scary scenarios here. (And then do yourself a favor and bookmark his page.) We came to a resolution on his matter, but the chat was a poignant reminder that people who try to do everything themselves are often being set up for a fall, or worse.

Listen up, people. And this goes for any deal, not just an exchange. Would you rather pay $300 for some advice and make sure you are dotting the "i"s and crossing the "t"s, or save the $300 and take a chance with the belief that you are 90% (or whatever percentage) sure about something, but in the off chance you are wrong, it will cost you $30,000?

Do the math. And consider the $300 an insurance policy. Tell me you don't have property or auto insurance or title insurance, for that matter. (The last one is a whole new topic.) As the local mortgage guy says on the radio, this is the mother of all no-brainers.

Back to exchanges. Regardless of what your accommodator, lender, accountant, real estate agent or second cousin might say, tax deferred exchanges are not for morons. Get it looked over. Get it vetted. Get the second pair of eyes. Spend a little money so you sleep at night. Or just ignore this and then come spend thousands to get the problem fixed later, if indeed it can be. Your call. If there is one thing I have learned in this business, it is this: any time I say, "This is an issue, but it won't comer back to bite me. I'll just let it slide," you may as well place money on the fact that I'll get bitten -- and hard.

If you think this is critical now, especially when it comes to 1031s, just you wait. Rumors are that if a certain candidate is elected, we're going to go back to 30% capital gains taxes in 2009. And if the rumors are true, then tax-deferred exchanges may in some sectors become almost the rule, not the exception.


Anonymous said...

I totally agree that it is important that you know the exchange company.

Lately there have three serious thefts of clients exchange funds two even from attorneys and one from a prominent company in the Southeast. Ask if they are bonded and insured and also have errors and commissions insurance.

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