Before you begin the 1031 exchange, here are some key topics I suggest all
business owners and investors consider immediately when they know a
capital gains event will take place. The first and most important step is to notify your current tax advisor BEFORE the sale. One of the greatest flaws I see is non-tax professionals DIYing their own tax plans. We once found a prospect who decided on his own to perform a 1031 exchange that actually resulted in more taxes by deferring the losses on the property that would have been recognized on the sale. It’s okay if you want to DIY the painting of your living room, but tax planning, like many complex professions, is not something to dabble in your spare time!

Your advisor should be accessible enough to provide you with a sound
capital gains plan before the transaction takes place. And the first step is to identify what, if any, will be the capital gains tax on the transaction if no tax planning initiatives were to take place. Oftentimes, clients find that they have suspended passive losses or other sources of real estate tax deductions to minimize or eliminate the tax liabilities associated with the gain on the sale. But other times clients are surprised to find how much they would pay without any tax plan in place for the transaction. You will need to align with an exchange intermediary before the sale takes place. If you wait until after the sale closes, the 1031 will be impossible. This guide has some great concepts to consider but make sure you have an experienced team along the way to guide you through an effective 1031 exchange and holistic tax plan for all income sources.


Mark Perlberg, CPA, PLLC