Should financial advisors be knowledgable about buying/selling RE and tax implications?

Question

I have a financal advisor on retainer for "asset management" but am trying to figure out what to do with my primary residence. I'm somewhat interested in real estate investing and may want to do a 1031 exchange (after renting it for a couple years), but to feel confident proceeding I feel I need someone who has the overall picture of my financial situation and who is knowledgeable enough to guide me about decisions relating to real estate. My impression after meeting with many financial advisors is that their expertise is mainly in securities and that they don't know much about real estate investing or the tax implications involved.

For those of you who have someone managing your investments in securities, has this been your experience as well? It makes sense to me that in this highly specialized world asset managers would focus on equities, since that's what they're dealing with on a daily basis, and pay little attention to real estate investing. Am I wrong? Is it possible to find someone who's very knowledgeable in both?

Jason Hull · Answer

Dina-- It's going to totally depend on the advisor. Just getting a securities license doesn't require knowledge of real estate laws/taxes. After all, those licenses are for stocks/bonds/other securities. I don't recall any real estate questions on my series 65 exam. CFPs should be a different kettle of fish, as real estate is covered in the basic courses, and there were questions on the CFP exam about real estate. That said, the amount of ink devoted to real estate is scant compared to the amount of ink compared to stocks, bonds, insurance, etc. If you're paying someone to manage your money based on a percentage of the amount of money you have invested with him, then he has no financial incentive whatsoever to get you into real estate aside from REITs. The more money you have in real estate, the less money he has to manage, and the less in fees he earns. I talk about it in the BP podcast #53.

Bill Exeter · Answer

@Robert Leonard The sale of the property must be completed with in three (3) years of the date that you move out, not five (5) years. You have to be able to "look back" five years from the date of sale and be able to say that you have owned the property and lived in the property as your primary residence for at least 24 months out of the last 60 months. Once you pass the three (3) year mark, you can no longer say that you have owned and lived in the property for 24 months out of the last 60 months.

Bill Exeter · Answer

Yes, you need to satisfy both requirements. You must be able to say that you have (1) owned the property for at least two years; and (2) lived in the property for at least two out of the last five years.

Dina Harleth · Answer

@Bill Exeter For the purpose of getting the homeowner's exclusion, do I need to have lived in the house as the owner? The house was gifted to me almost two years ago, but not quite, though I've been living in it for longer than that. Do I need to wait until two years from the date of the gifting in order to qualify for the homeowner's exemption? Thank you!

Robert Leonard · Answer

Thanks @Bill Exeter for clarifying my misstatement. Good catch!

Robert Leonard · Answer

Hello @Dina Harleth, you are right, they won't offer any information about "alternative" investments like real estate. There's a term called "selling away" that forbids those licensed to sell securities (traditional stocks, bonds, mutual funds) from offering any advice about those unregistered securities/investments. I've sought opinions and advice from several and it always comes down to me doing my own homework and making my own decisions on what's my best options. Here's my $.02 for your situation. You don't need to do a 1031 of your primary residence if you have less than a 250k gain (500k if you're married) from the sale. As long as it happens within 5 years from the time you no longer occupy the house. You have to have lived in the property 2 out of the last 5 years to qualify for the tax exemption.

William Pittman · Answer

Dina, As a financial advisor as well, I can certainly help answer this question for you. Each firm and individual can be very different on a case by case basis. For example, as a financial advisor, I run into your type of situation VERY frequently with clients. A great advisor will have CPA's, estate attorneys and other professionals that they seek for guidance in 1031 exchange situations. Another great question to ask your advisor would be how often they have done these types of transactions with clients. Also, I assume you have a pretty solid relationship with your advisor, but just make sure if they are newer to the industry that you have a connection to a Manager. If you would like to reach out to me just for general guidance feel free to reach out. I'm in California, and my email is william.pittman@trilogyfs.com and my cell is 714-600-1480. I won't step on any toes, but just like to help! Hope this helps you!