RTS #054 CAN and SHOULD are NOT the same thing

We have to help clients make great life decisions AND THEN figure out tax-efficient ways to go about those decisions. Too often tax content online focuses on how things technically work, not whether they are actually a good idea in a specific situation. Delivering massive value as an advisor is the intersection between having the right knowledge and being able to apply it to the right situations. A recent story from a taxpayer named Rob is a great illustration of NOT doing something just because it’s possible.

Rob has a rental property. It’s been a great property, but as he gets to retirement, he’s not really interested in continuing to be a landlord and is considering selling the property, BUT that’s going to mean a big tax bill. Enter social media to muddy the waters on what he should do next, specifically Rob hears about a 1031 exchange and is rethinking his plans.

In short, a 1031 exchange allows a taxpayer to sell a property and then purchase a similar property while deferring any gain on the original property. This can be a powerful strategy that takes advantage of the time value of money (eventually, the IRS will get theirs) and maintains access to capital…but it’s not on the low end of the complexity scale when it comes to tax planning. In fact, this is an area where you absolutely want someone on your team who does this all the time to make sure it gets done right. It is something that needs to be planned proactively and understood thoroughly to make sure rules aren’t accidentally broken.

There are rules about the timing of the sale and the subsequent purchase. Rules about what constitutes a “like” property and rules about how everything gets documented and executed. This is a strategy often used by people committed to real estate investing over the long-term, not a one off topic to play around with.

Rob’s concern is that by NOT doing a 1031 exchange he will have to pay all the taxes now instead of taking advantage of an opportunity to defer taxes into the future. He is most likely technically correct but there is more to life and even financial planning than just taxes. In Rob’s case we discussed what his ultimate goals are and recommended he forgo the 1031 exchange to focus on what’s really important to him as he nears retirement.

There are other tax planning strategies like this. As a financial advisor, it’s important to understand what’s out there so you can have meaningful conversations with clients, provide guidance and involve experts when it is necessary. Clients don’t expect you to have all the answers; they expect you to be committed to helping them find them.

Make sure you are blocking time to expand your tax planning knowledge to deliver value to your clients regardless of the topic.

Happy Tax Planning!

P.S. Steven will be discussing this and other “exotic” tax strategies live at a FREE WEBINAR on June 19th. Claim your spot here.

About The Newsletter

The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.