There is a tendency on the part of some people to not want to bother with new things or to avoid even discussing issues with which they are not extremely familiar. In the worlds of consulting and most any business relationship, this is a disservice to the clients, as well as a potential liability to the advisor.

When we moved here to the Ozarks almost eleven years ago, not surprisingly, there were hundreds of differences in all kinds of things from what we had been used to in the Bay Area. Many of those differences were obviously part of the reason we had decided to relocate.

As we met and interacted with more and more people, we noticed that many of the things that had been common knowledge back in the Bay Area were practically unknown here in the Ozarks. We knew that we were moving from the highest tech part of the country (my main office was in Fremont, CA – part of the extended Silicon Valley) to one of the least technically up to date areas (high tech was having an answering machine). It was also a running joke in this area that they were happy to be twenty years behind the rest of the country because when the world ended in places like the PRC, there would be another 20 years to prepare for it here in the Ozarks. There was a general attitude by many that there was no need to learn about new things because everyone had gotten along just fine without them.

I will be the very first to admit that it is impossible for anyone to know absolutely everything about a topic, especially something that is constantly changing as much as the world of taxes. However, it is extremely important to be aware of at least the existence of new developments. When we financial professionals are working with clients, they expect us to know more than they do and to catch the signals for money saving opportunities that may apply to them.

After moving here, we started encountering people and hearing story after story about people having to pay huge amounts of taxes from the sales of their properties. The influx of people to the Ozarks from the PRC and the Chicago area had drastically driven up prices, resulting in huge profits for people who had often paid almost nothing for their properties.

When we would ask why those people hadn’t done Section 1031 (aka Starker) tax deferred exchanges so they could avoid those huge taxes, we discovered that almost none of the tax and real estate professionals had ever heard of 1031 exchanges. To them, that was some new fangled thing for big city folks and had no application here in the Ozarks. In the meantime, their clients were needlessly paying hundreds of thousands of dollars of taxes.

Again, it’s a product of the environment that back in the PRC, most tax and real estate pros knew about 1031s and would broach the idea when a client may be a good candidate for one. The famous Starker case was in 1978, and the official blessing of delayed exchanges was given by our rulers in DC in 1984; so it had been around long enough to become part of the collective knowledge. There were even scores of exchange accommodation companies to handle the paperwork and funds for clients.

Here in the Ozarks, the existence of 1031 exchanges was almost completely unknown by tax or real estate pros. Many of them weren’t even interested in learning about them and were unconcerned that they weren’t helping their clients save huge amounts of taxes. As I toured around Arkansas, Oklahoma and Missouri, speaking to groups of CPAs and Realtors, I explained the mutual benefits of helping their clients save on their taxes.

I also explained that, as more of their clients learned about 1031 exchanges after the fact, they would become extremely angry that they weren’t told about 1031s by either their tax or real estate pro before thy had sold their properties. The reaction to such news is handled in one of two ways. The old style from this part of the country is to slough it off and chalk it up to experience (“we’ll know better for next time”). The other response is to blame someone and take legal action for the fact that they weren’t informed of ways to save taxes. Besides the huge amounts of money people from California and Illinois were bringing to the Ozarks, they were also bringing their knee jerk reflex to sue anyone for any reason. I lost track of the number of people wanting to know if they could sue their tax and real estate pros for not telling them about 1031 exchanges. Having been the victim of nuisance lawsuits myself, I did not want to add to the massive volume of litigation and encouraged everyone to consider this a learning experience, although they had very good cases of negligence against their advisors.

As I toured the area and spread the word about the value of exchanges, I was trying to motivate people to start up exchange accommodation services. I even offered to provide the forms that I had developed as owner of an exchange company back in the Bay Area, Realty Arrangements, Inc. (RAI). It was too new a concept for this area and nobody wanted to get into this service. I constantly heard “you’re so smart, why don’t you do it.” I discussed this idea with the CPA to whom I had sold RAI, Doug Heimforth. I had signed a non-competition agreement which I didn’t want to violate, so I asked him about having a branch office of RAI here in the Ozarks. He decided it would be easier all around for us to just start up our own new company out here; which is how Sherry’s Tax Free Exchange Corporation was born.

The motivation for this longer than expected piece was my seeing the issue of suing CPAs and Realtors for not informing clients about 1031 exchanges in some of the Q&A boards I occasionally check on the web, such as this one. The desire to force tax advisors to pay for their failures to alert clients about tax saving options is still very strong.

As I would explain in my speeches and seminars to CPAs and Realtors, they don’t all have to become experts on the details of 1031 exchanges. There are far too many tax issues to become an expert in every one of them. However, they should at least be aware of the signs that indicate a 1031 might be beneficial for their clients. When they detect any of these signs, they should refer their clients to consult with someone who can dig in and analyze and advise on the specifics of their situation.

It won’t always be the case that a 1031 exchange is the best move. On at least half the cases I consult on, we come to a mutual conclusion that a 1031 exchange would not be appropriate, for various reasons. While the end result may be the same, this is actually quite different than my arbitrarily making the conclusion, or completely ignoring the possibility, without even discussing it with the client.