The information provided is merely for educational and informational purposes. It is not intended as a substitute for professional advice. Should you decide to act upon any information provided in this writing, you do so at your own risk. While the information in this writing has been verified to the best of our abilities, we cannot guarantee that there are no mistakes, errors or that the information is the most up to date.

As REALTORS®, we have the answers. Or perhaps it's better to say, we have the tools and ability to show our clients their options. To do that, it's important to stay up to date on those options, including some of those you may not come across quite as often. It's perhaps more important now than ever before to be proactive in your preparation for each client you have the opportunity to serve.

Check out an overview of three less common options to get you started!

Using A 1031 Tax Deferred Exchange

 The 1031 Exchange allows your client to sell one or more properties (generally rental or investment) and defer the payment of the capital gain taxes by purchasing one or more replacement properties. The advantage for your client is they can keep 100 percent of their money (equity) in the sale, and this money can work for them instead of paying (losing) about one-third of their equity to taxes.  

There are some detailed requirements for executing a successful 1031 Exchange that your client will need to consult their financial advisor to fully explain, but here are a few:

• Must have a "Qualified Intermediary" (QI). This person/entity is very important and must be part of the process prior to your client entering into a contract. They ensure the necessary legal documents and process, including receiving and holding the funds your client receives for the sale of their property, to be used in the new replacement property. Your client can NEVER take possession of the proceeds from the sale of their property! 
• The replacement property or properties must be equal or greater in net purchase value of the property that was sold.
• The sold property and replacement property need to be "like kind" property. There is a lot of misinformation related to "like kind" property, so your client needs to have a clear understanding from their financial advisor or the "Qualified Intermediary."
• The sold property can be replaced with multiples properties, or the sold property can be multiple properties and be replaced with one property.
• There are specific deadlines the transaction must meet, such as your client will have 45 calendar days from the closing date of his/her sold property to identify potential like-kind replacement properties and an additional 180 calendar days to complete (close) on the replacement property. (There is a new Covid 19 amendment that has modified these time periods so be diligent in knowing the current information.)
• There is a three-property identification rule that is VERY important because it allows your client to identify three replacement properties. This is important because your client needs options in case the first option property for whatever reason cannot be successfully purchased/closed.  

This short video is an excellent overview of the 1031 Exchange process.

Using A Reverse 1031 Exchange

This opportunity is unique — and just the opposite of the 1031 Exchange. This exchange process allows your client to purchase the replacement property of his/her choice BEFORE selling the property that the new property will be replacing. All the detailed requirements of the 1031 Exchange remain including engaging a Qualified Intermediary (QI) before the process is started. Here is how it works:

• Your client identifies and closes on a property that they will be using to replace their current property prior to selling their current property. Your client moves forward with selling their current property.
• Again, your client will have 45 days from the date of purchasing the new property to identify the property that he/she is going to sell (replace) and 180 days to close on this existing property.

There is a big pro and a big con of the Reverse 1031 Exchange.
The big advantage for using a Reverse 1031 is that your client does not have to wait until their existing property sells before choosing and closing on a replacement property. This is especially important if the market is hot and your client is concerned about losing the replacement property of their choice. 

The big risk is if your client cannot sell their existing property within the 180-day timeframe, they will lose the tax deferred process and will have to pay taxes on the gain when their existing property does sell.  

This short video provides a great snapshot of the Reverse 1031 Exchange process.

Using A Self-Directed IRA To Purchase Real Estate

So, what is a Self-Directed IRA? The Self-Directed IRA originated as part of the Employee Retirement Income Security Act of 1974. This is an individual retirement account that gives you more control and greater diversity over your investments and retirement savings. Unlike other IRAs, you are not limited to stocks, bonds or mutual funds.

A Self -Directed IRA is very desirable for those that want to control their own financial decisions. It protects against the possible volatility of the stock market and allows them to take advantage of investing in alternative assets, such as real estate.

When talking to your client about financing options, do NOT be shy to ask if they happen to have a Self-Directed IRA! This tool is under-utilized because the biggest risk of owning real estate in a Self-Directed IRA is the potential lack of diversification. Just as the opportunities above, this too will require your client to consult with their financial advisor and the administrator / custodian of their IRA account.

Check out this video for details.