Remen Okoruwa
1031 Exchanges have become increasingly popular with property owners because they provide an opportunity to reposition investment property to help meet the owner’s unique goals and objectives – all on a tax-deferred basis. With a 1031 Exchange, property owners can preserve their entire investment and defer all federal capital gains tax, state capital gains tax, net investment income tax, and depreciation recapture that would normally be due upon the sale of an investment property. In some states, the total tax paid could be as high as 37% so the savings provided by a 1031 Exchange may be substantial.
However, navigating the exchange process can be complex and a misstep can result in either a failed 1031 Exchange or the purchase of replacement property that is not suitable for the investment property owner. Additionally, 1031 Exchange rules and timing requirements are very strict and must be followed in order to qualify for tax-deferral. Understanding the basics of a 1031 Exchange and having the right 1031 Exchange team in place is crucial to performing a strategic and successful exchange.
No matter which threat you’re building your emergency preparedness kit to best anticipate, you should always include the following essentials in your kit:
Water. For each person in your apartment, have one gallon of clean water on hand. If you’re anticipating a certain disaster type and can guess how many days that disaster could last, stock one gallon of water per person per day. During a pandemic of similar severity to COVID-19, you’ll likely have no issue accessing your usual tap water, but a natural disaster such as a hurricane or earthquake could knock out water lines.
Non-perishable food. If you’re trapped at home for any reason, a supply of canned foods such as vegetables, beans, and soups will make all the difference. Make sure you have a non-electric can opener in your kit as well. Non-stir nut butter, crackers, dried foods, and protein or energy bars are unlikely to spoil, too.
Non-perishable pet food. If you have pets, you’ll need to feed them during an emergency, too.
Baby and children’s supplies. Make sure you can properly clothe and feed any young kids, toddlers, or babies in your apartment by including diapers, baby formulas, wipes, and infant formula in your kit.
Radios. Although the internet and smartphones dominate modern life, natural disasters can render them useless. Keep two types of battery-powered or hand-crank radios in your emergency kit: One that can receive AM and FM signals, and an NOAA weather radio with a tone alert for potentially life-saving weather and evacuation updates.
Flashlights. Every person in your apartment should have a flashlight in your emergency kit so they can see properly during power outages.
Batteries. Keep plenty of spare batteries on hand for your devices. Be sure your batteries are the right type for your devices.
Whistles and noisemakers. You can use these items to signal for help when no other communication forms are available.
Basic sanitation supplies. Packaged, moist towelettes and sealable trash bags may be useful for extended periods of forced isolation. Feminine products may be good to keep on hand as well.
Wrenches or pliers for turning off utilities. If flooding or earthquakes occur, your apartment may be less prone to fires or other dangers if you can manually turn off your utilities.
Local maps. In an emergency, your smartphone’s mapping app may not work, so it’s always worthwhile to keep printed local maps in your emergency preparedness kit.
Portable charging supplies. In the event that cellular networks are working but electricity is unavailable, your smartphone will be useful, but its battery won’t last forever. Keep battery packs or other portable charging supplies handy.
Prescription and non-prescription medications. If you can’t survive without certain pills or other prescriptions, keep them on hand. Non-prescription and over-the-counter medications can also prove helpful in a number of situations.
Toiletries. Even if your water isn’t running, you’ll still need to brush your teeth. If your water is running but your electricity and heat aren’t, you can likely still shower.
Toilet paper and paper towels. During the COVID-19 pandemic, these items have been especially hard to come by. Buying a bulk package or two of each will keep you stocked for quite some time.
Disinfecting wipes and hand sanitizer. To keep dirt, grime, and pathogens off your hands and disinfect your apartment surfaces in an emergency, keep an abundance of these in your emergency kit.
Masks. Dust masks can protect you while you comb through rubble after a natural disaster, and surgical masks can lessen your chances of contracting or spreading pathogens. As many leading public health authorities have said, you should always reserve N95 respirators for health professionals, so don’t include these in your emergency kit.
You’ll be better prepared if your emergency preparedness kit includes these items, but you may be able to forgo them, too.
Visual aids. Keeping extra glasses or contact lenses in your emergency preparedness kit may help for extended emergencies.
Cash. You may find it helpful to have non-electronic currency in your emergency preparedness kit.
Documents. Government-issued IDs, proof of residency, insurance policies, and bank statements may help you get resettled in certain emergencies.
Warm clothes, waterproof shoes, and blankets. During a winter emergency, if the heat goes out, having warm clothes, waterproof shoes, and blankets in your emergency preparedness kit will help you stay warm.
Fire extinguishers. If an emergency causes your apartment to catch fire, you’ll be able to dull the flames.
Matches or lighters. When your heat or cooking options fail in an emergency, you can use matches or lighters for warmth or (if done safely and carefully) cooking.
Entertainment options. If you’re trapped in your apartment but you’re safe, you’ll need a way to pass the time. Board games, books, puzzles, and other non-electronic options can help you pass the time when your utilities are unavailable.
Bleach. If your water has run out, you can disinfect other water by adding 16 drops of bleach to a gallon of water.
Is established and well-respected. The 1031 Exchange industry is a relatively small community. Word gets around quickly if professionals recommend replacement properties that are not suitable for owners or do not have a firm understanding of the nuances of the tax code. Furthermore, there are new entrants to the industry who have not had the experience navigating multiple market cycles or the great recession. We believe a long-standing proven track record of happy clients dating back 10+ years speaks volumes when evaluating a professional to work with. If you are considering working with a 1031 Exchange company, be sure to ask if you can speak with prior clients – ideally clients who have recently performed an exchange and performed exchanges multiple years ago so that you can hear about both experiences.
Meets with you to understand and discuss your situation to determine suitability. Developing an optimal transition strategy and selecting optimal replacement property options is a process that must be tailored to the individual client. Some 1031 Exchange companies may take a “choose your own adventure” approach, presenting a myriad of options with little context and analysis shared with the client. The right 1031 Exchange partner should take the time to understand your objectives and should invest in the development of an intentional strategy aimed to position you for potential success. This means having in-depth conversations (ideally in person) to discuss your financial & lifestyle objectives, your investment property, and tax situation to first determine whether a 1031 Exchange is a suitable course of action.
Educates you on 1031 Exchanges, process, timing, and rules. A good 1031 Exchange partner should always take an education-first approach and be willing to invest the time to ensure a client is familiar with the tax code and all suitable options they have available to them. Your 1031 Exchange partner should provide a balanced perspective, sharing both the opportunities and risks any potential course of action presents.
Provides strategic consultation. While the timeline following the sale of an investment property is rather short, the exchange process need not feel rushed. Proper planning can serve to extend the timeline and allow for proper strategic decisions to be made. Additionally, some strategies such as a refinance to extract liquidity in advance of a sale, can take a year to “season” before the sale occurs. A good 1031 Exchange company should be patient and willing to work with clients over several years, if needed, to execute a plan that is in the best interest of the client. Furthermore, they should be available following an exchange to address tax, ownership, and estate planning questions as it relates to the exchange.
Develops a transition plan to help meet your objectives, is strategic, and achievable. An owner's objectives change as life happens and markets change. A transition plan should be a living, breathing document that can be updated as needed. Intentionality is key to an optimal exchange strategy. A good (and smart) 1031 Exchange partner will always develop a plan that is both strategic and achievable.
Provides you with all suitable and available 1031 Exchange options. There are many exchange strategies and replacement property options available to investment property owners including fee-simple real estate, net-lease properties, Delaware Statutory Trusts (DSTs), Tenant-In-Common (TIC) property and even Real Estate Investment Trusts (REITs). A quality exchange company should provide all suitable options so that you have the full breadth of choices available to you. Furthermore, a good 1031 Exchange partner should be agnostic to the solution provided and only recommend those that are in your best interest and based on your financial and lifestyle objectives.
Works with your CPA, Estate Planning Attorney, and Financial Professionals. Your 1031 Exchange company must be willing to work with your other professionals to ensure that all the pieces are aligned and seek a successful exchange. Some 1031 Exchange companies provide these services "in-house" and are constantly trying to cross-sell accounting, estate planning, and financial planning services to their clients. While the integrated approach may appear to streamline the process, we feel it presents a conflict of interest in terms of the recommendations provided to an owner and should be avoided. The real estate transition and replacement property selection process is sufficiently complicated to warrant using a firm that specializes in this space. You would not want your general practitioner doctor performing surgery on your knee, nor should a financial professional who specializes in traded securities develop your exchange strategy.
Has a strong network of additional professionals to recommend. Should a client need a tax-preparer, real estate broker/realtor, real estate attorney, estate planning attorney, qualified intermediary, or financial professional – a competent and established 1031 company should have a strong network of proven, trusted outside individuals or firms that can be recommended to a client if needed.
Offers a flexible & competitive fee plan. Compensation for 1031 Exchange companies can be structured in several ways. The approach that is suitable for a client depends on their objectives. Some clients prefer a “planning fee” approach, others prefer paying a one-time commission consistent with fee-simple real estate acquisitions. A good 1031 Exchange partner should be able to provide all compensation structures and have an honest conversation about not only what the fees are, but which fits best with your objectives.
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