The Biggest and Most Common Error in 1031 Exchange

Understanding the difference between permissible and non-permissible selling expenses is difficult. The line between the two is not well defined in law or most cases. However, the consequences certainly are. In the worst case, a failed exchange. In the less extreme, “boot” for the investor to pay tax on.

However, there are enough guidelines to avoid the grey areas of an exchange.

The following are permissible and non-permissible expenses:


  • Escrow agent, settlement agent or closing attorney fees

  • Real estate broker's commissions

  • Tax advisor fees related to the disposition or acquisition

  • Attorney fees and costs related to the disposition or acquisition

  • 1031 Exchange Qualified Intermediary fees

  • Finder fees or referral fees

  • Recording or filing fees

  • Documentary transfer taxes

  • Owner's title insurance premiums


  • Financing or lender costs such as loan fees, loan points, appraisal fees, mortgage insurance premiums, lender's title insurance policy premiums, and other loan processing fees and costs

  • Insurance premium payments

  • Repairs and/or maintenance costs

  • Prorated Property taxes

  • Prorated rents

  • Security deposits

  • Payoff of credit card balances

This simple list does no justice to the potential complexities of this transaction. There is no substitute to engaging tax, legal and financial 1031 experts prior to starting your exchange. Most non-permissible items can be avoided with a properly structured deal.



Need Cash? DST Should Not be the Option

Our prospective 1031 Exchange / DST clients come to us with all sorts of goals. For some folks, it is retiring. For others, it is a desire to stop managing property.  

Yet for some - it’s more simple: they need Cash.  

Needing cash for another property, business investment, or personal goal?  Selling an investment property seems to make sense.  However, many forget about the tax bill.  Seeking tax deferral, they often show up at our door looking for a solution.  

Very often DST isn’t it.  Instead, a cash-out refinance might be the better move.  

You cannot remove cash from a 1031 exchange without incurring a taxable event. This cash removed from the exchange is known as “boot”. Think about what 1031 exchange / DST is for.  It’s for a life change, it’s a tax deferral tool, and it’s a planning tool.  If your goal is short term cash, cash-out refinance of your current property may be a better move.  If you are already selling your property and need some cash from the sale, then a combo strategy might make sense. But let’s talk DST when your goals align with the solution. 



Medicare News and Notes

We recently sat down with Marcia Blinzler of The Blinzler Group, which focuses on all things Insurance, specifically Medicare. She shared with us important updates and changes for you, a loved one or friend on or near Medicare enrollment.

Medicare Annual Enrollment Period is Around the Corner

The following are key dates and information to remember:

  • The Annual Enrollment Period (AEP) is October 15th through December 7th.

  • The AEP applies to everyone. It is for Medicare Advantage Plans and Part D drug plans. It does not apply to Medicare Supplement Plans.

  • Plans change each year therefore it is important for you to review your plan with a certified insurance agent.

  • A certified insurance agent cannot call you to solicit Medicare business unless you have first given them permission.

  • Have your doctor’s names and prescriptions handy to research the option that is best for you.

  • Know your benefits and ask questions.

New Medicare ID Cards

If you are nearing Medicare eligibility or know someone who is already there, check out the following link about the new Medicare ID cards that are being processed.

The new Medicare numbers are being issued unique to you to help cut down on the alarming level of fraud.

Consult with Marcia

If you have specific questions related to Medicare, we would love to place you in contact with Marcia and her team. Please send us a message or call to get connected.



180 Years of Stock Market Losses

We recently read a wonderful piece from Ben Carlson who writes a blog under the name A Wealth of Common Sense.  You can check out the full piece here

The article emphasizes a point we make constantly - market risks are real.  In fact, risk has been an element of markets going all the way back to the 1800s.  Stocks are usually in a "drawdown" state.  What does this mean?  Stocks don't make new highs every day.  Most of the time your portfolio will be worth less than its all time high.  

To give more context on what this looks like, check out the chart image.  It shows the percentage the market was underwater (in a drawdown period) going back to 1927.

DDs 100yrs article.png


Wonder why we talk about risk all the time? The article emphasizes that markets will likely continue to fluctuate and experience losses on a regular basis.

This is why we look to side-step the worst losses as a major part of our investment process.  Maintaining your portfolio and keeping you aligned with your goals is the most important job we have.



Thinking About Decision Making and the Link to Investing

Hello Friends - sharing with you the following link to a GQ interview with Annie Duke, decision strategist and former pro poker player.  The mental approach to making choices contains so many parallels to investing.  How do you think about making decisions?

Here is one quote from the piece:

"We tend to assume that if something works out, we're genius decision-makers.  But the outcome of a situation is often down to luck - or information we don't have.  All we can do is make the best choice possible given what we know, be prepared to be wrong, and move forward", she advises.

"The more you can get comfortable with uncertainty, the better off you are."



Surprising Clients

Our team met with a client today to go over her financial plan.  Her customized goal plan showed that she was saving far above what was necessary…even based on the “worst-case” scenarios we mapped out. 

It all went great and at the end she said, “I’m surprised. Most financial advisers would have just told me to invest every extra dollar I have.  Thanks for being honest!”

This comment unfortunately speaks to the expectation for the financial services industry. It’s a sales based mentality!

Goals first, an investment strategy to match and a plan to stay on track.  It's that simple!  



“I hate the word retirement” – views on financial planning that might surprise you

Don’t live today and sacrifice/save so that you can live at retirement

You can’t just not live today so that someday at some magical age all of a sudden you can live.  At that point, you may not be physically able to enjoy it or you frankly may not have enough.  I think this mentality is completely outdated.  You need to enjoy the journey, not just the outcome.  The pot at the end of rainbow isn’t real.  If you’re miserable all the way to retirement, chances are you’re probably going to be miserable in retirement.  Money is probably not the issue.  Now this doesn’t mean you shouldn’t save and just spend recklessly.  No.  You need to have a plan, be a good steward of your money, and use common sense.  If you have a plan, you can then find that balance, make better decisions, and take full responsibility for those decisions.

This leads to my next point...

Eating principal in retirement

Most planners will try to build a plan so that you don’t eat your principal.  In theory, this would be a perfect scenario.  However, not everyone is in the position to do this or wants to.  You didn’t save money for all those years before retirement to then not spend it.  If I could plan it perfectly, you’d write a check as you went into the grave and let it bounce the next day 😃 

Again, I’m not saying you should be irresponsible with your money. But I think it’s fine to eat principal. It’s more about making the plan work, but you have to be educated about it.  If your financial plan shows you eating principal in retirement and the downward slope is pretty steep, you have to keep in mind all of the unknowns that could exist down the road that could blow up your plan.  A major unplanned health expense, disability, long term care, a new administration takes over and taxes go up 25%!  Whatever it is, you have to build room into your plan for contingencies.  So, eating principal is fine, but make sure you leave enough room in there for the unknowns.

Leads to my next point…

Plan for the worst-case scenario!

Every plan has a set of assumptions behind it - taxes, inflation, return on investment, etc.  I’ve seen so many plans where these assumptions are completely nuts!  For example, when I got in the business in the early 2000s, it was late into the tech bubble time period.  The market crashed and was still crashing.  But just a few years prior to that, the market had been cruising up at phenomenal rates of return.  My first boss was showing his clients plans with a 12% average annual rate of return.  Guess what happened?  The next 10-12 years had a 0% rate of return for US Stock markets!

To build a rock-solid plan, you need to build in the worst-case scenario. To do this, you need to overestimate taxes, overestimate inflation, and underestimate investment returns.  Then see what it takes to make this “worst-case” scenario work.

When I build plans for clients, I want to give them the best chance possible to succeed.  So I build them assuming the worst-case scenario.  It increases the chances of success, but it also shapes the client’s behavior and forces them to do the right things.  At the very least, it puts them in a position to be educated, know what they need to do, and know what the potential consequences can look like if they don’t follow through.

Plan for a range of scenarios

In practice, I usually build two plans for my clients.  A best-case and worst-case scenario.  I show them both, show them what can happen if they do the bare minimum, show them what can happen if they push to do more, and let them make the choice.  Ultimately most will end up somewhere in the middle.  But it takes the pressure off and gives them a couple of simple steps to follow.  All they need to do is pull the trigger and rely on their financial adviser to do the rest!

I hate the word Retirement!

This word is terrible.  There's too many assumptions about what this means and a connotation towards things ending. My experience working with people is that this couldn't be further from the truth! I usually tell clients this is your Independence Day. This is a milestone where you've reached the point at which you get to decide what to do with your time. You're making choices based on what you want, not based on money.



What Kind of Risk Should You Be Taking?

Risk Taking, Financial Planning, Expectations and Behavior

If you have ever worked with me as a client, you know that I’m constantly talking about risk.  There’s a reason for that.  Risk is probably going to be one of the largest determining factors in whether you reach your financial goals.  Don’t take enough and you won’t get the returns you need to retire or reach those goals.  Take too much and you run the risk of your portfolio taking too many losses at the wrong times and your financial plan essentially “blowing up”.

Let’s break this down. There’s three ways I look at risk as a Investment Adviser and Investor. 

1)      Risk with regards to investment returns

2)      Risk with regards to a Financial Plan

3)      Risk with regards to behavior. 

All are super important and frankly tie together like the ingredients in a recipe.

Let’s start with what risk is. 

Investment Risk

In my world, I refer to real investment risk as “Drawdown”.  This is simply the maximum loss you have ever experienced from your peak portfolio value swinging down to your lowest portfolio valueYou’ll hear investment risk referred to in other ways, but this is the number that actually counts.  If your portfolio drops from $500,000 to $250,000, that’s a 50% loss or “drawdown” and that is going to have a major effect on your financial plan.  The real question is can you handle that 50% loss - both from a financial planning standpoint and from an emotional standpoint?

Now we’ve all heard the old axiom “the more risk, the more reward”.  This is true in a lot of aspects of life, but with investing…it doesn’t always play out that way.  This is due to time frame.  If you’re ever worked with me, you’ve probably seen the opening image to this article.  This killer chart shows the returns of the U.S. stock market (represented by the S&P 500) going back 120+ years.  

There are numerous periods of time in our history where the U.S. stock market went 10-15 years earning next to nothing.  So do you get more return for taking more risk?  If we’re looking over 100+ years, then historically yes.  But we don’t invest for 100 years.  If you’re lucky, you’ve got 30-35 years to save/invest for retirement. When you push your investing time horizon down to 30 years, you now have numerous times in history where you could have taken a lot of risk and made nothing on your money.  You can’t afford to have 10 or 15 years out of your 30 give you a nothing in return.  You can’t make up that kind of time.

Financial Plan Risk

Knowing the potential risk in your investments, what kind of risk should you take with respect to your Financial Plan? 

What do you need to reach your goals and what can you handle? 

When I work with clients on their plan, the first thing we figure out is what risk they need to take in order to potentially make their goals happen.  Any risk level beyond that is a personal choice.  If you only need 6.5% annualized return to make your retirement possible at age 60, then we need to build a portfolio that can give you that.  If you need 8% return, then we build a portfolio that has the potential for that.  There’s no need to take risk beyond that unless you want it, understand it, and are willing to take responsibility for the potential outcome.

Risk…..Your Behavior?

What this means is - at what point are you going to panic and do something with your portfolio that is counter to achieving the plan we’ve just built? At what potential loss are you going to call us and sell everything out of fear?

Or from another perspective - at what point are you going to call and say your portfolio isn’t making enough compared to the S&P 500 Index, the Dow Jones, or the NASDAQ? Then sell your investments and hop to another Financial Adviser/Firm to try and get the investment returns you “think” you should be getting?

I’m not saying you should stay with an Adviser who is under-performing year after year.  What I am saying is you need to have a good understanding of the approach your Financial Adviser is going to use to invest your assets to make the plan he/she should have done for you work!

Your Adviser should be setting realistic expectations for you and should provide you with a pretty good idea of how and why his or her investment approach should work. And he/she should have some method to help them understand what your tolerance for risk actually is (from a behavioral standpoint).

How Do You Think About Risk?

It’s easy to start thinking about how you view risk.  Simply click here to answer a few questions.  At the end of these questions a portfolio that best meets your risk profile will be created.  This is the first step we use with clients.

Give it a try!

Take a simple Risk Questionnaire



The 3 Questions You Should Ask Your Financial Advisor Right Now!

Talking to your adviser feels like this when you don't have the right questions:

1)       What does this cost?

2)      How much have I made?

3)      How do you make Investment Decisions?

Let’s face it, you don’t want to spend time thinking about your Financial Advisor. 

You likely use a friend of a friend who works at a well-known firm.  You’ve ridden the market highs and lows with this Advisor.  Everything appears about as good as it can be. 

Even if you were feeling uneasy, how would you find another professional to work with?  Where would you start?  How could you know if the alternative is better than what you have?  What if a new Advisor is worse?

So how can you evaluate who you are working with? 

Three simple questions.  Each answer requires plain language and an easy to understand, non-finance degree required response.

What does this cost?

Why ask?  - Financial Advisors charge fees to manage your accounts.  What many do not realize is there are also fees inside the investments your Advisor chooses to put into your portfolio.  They exist, but you just don’t see them.  If you tack on a number of different investments plus other investment products (like annuities), you can really begin to see the fees you’re paying increase greatly.  The whole picture can become convoluted and extremely difficult to calculate your total cost.

Keep in mind that many similar investment products have vastly different fee structures.  Plus, what may sound small in a fee differences (1% let’s say) can become a large number over time. 

Answers we often hear – The Advisor provides an estimate that is inaccurate, or takes months to respond to you, or the Advisor never actually answers the question. 

And the right answer is? – The Advisor should be able to provide you the fee being charged for Advisory services and the fee for the investments used in your portfolio. Giving this answer should be easy for the Advisor.  Managing investment costs is the simplest way an Advisor can provide value for you.

How much have I made?

Why ask? – While fees are a hot topic, the only number that matters is how much you make!  Returns will drive you towards meeting your goals. This is the whole reason you’re investing in the first place.

Ask your Advisor what the compound annual growth rate of your account has been.  This is a finance term, but your Advisor should know it.  Basically, it’s the rate at which your account is growing each year on average.  During the financial planning process, this rate is used to determine how much and how long you need to save for your goals.

Answers we often hear - “All investors have different goals and time horizons; returns will be very different.”  Or the Advisor will start to describe current market returns.  Clients are left with the impression that the market, not the Advisor, is driving returns.  What’s more troubling is Advisors that do not provide this information on a regular basis or struggle to answer the question. 

And the right answer is? – A number, any number!  You want your Advisor to be able to explain your returns and how they will help meet your goals.  Just “beating the market” should not be the number you’re looking for. You also want to understand how your investments have performed in different types of markets.  For example, how have your investments performed in poor  markets (like 2008)? 

How do you make Investment Decisions?

Why ask? – Contrary to what you may believe, most Advisors outsource the actual management of your investments.  While there is nothing wrong with utilizing outsourced managers, your Advisor should deeply understand the investment strategy being used.  We worry most about Advisors who do not understand how investment decisions are being made and instead rely on the track record of the investment manager or name of the investment firm.  This simply isn’t good enough for your money.

Answers we often hear – “We follow the market” or “We use top performing mutual funds/managers”.  Neither of these answers are an actual strategy.  Follow up questions could include:  What happens when these investments underperform?  How did you pick these mutual funds in the first place?  Why did you buy that investment?  When would you sell an investment?  Probing on strategy, it seems traditional Advisors don’t have one at all. 

And the right answer is? – Here’s our strategy.  At Insight, we follow a rules-based, systematic investing approach.  This may sound fancy,  however we can write the rules on a napkin and explain it to you!  It’s the same strategy in every market, all the time.  We know when we’re going to buy, when we’re going to sell, how much we’ll invest in each individual holding in your portfolio, what we’ll do in good markets, and what we’ll do in bad markets.

Every Advisor should know this and be able to explain it to you.  If they outsource it to someone else, they should have a deep understanding of the company they’re using and that company’s rules for managing your money.  We don’t think that’s asking too much!

Call to Action!

Want the right answers to these questions?  Schedule an appointment with us.   Head over to our facebook page and click request a time.  

Looking to Buy a House Soon: The Top Investments for Your House Down Payment

Here’s a common question we get from clients - “I have a down payment saved for a house.  I want to buy in the next two years.  What should I invest this money in?”

The answer is simple - NOTHING! 

Disappointed?  Many folks often are at our response.  However, the desire to grow your down payment through investing over a short time frame violates two of our key investing principals:

Goals First

Is the down payment you currently have enough to secure the house you desire?  Congratulations, goal achieved.  We invest (and save) to achieve our goals and you have done that.  Are you still looking for a few more dollars to grab the house of your dreams?  Save, be patient, and follow your financial plan.

Manage Risk

Let’s be honest here.  No investment, investment strategy, or investment professional can promise that over a two-year period you’ll make you money.  If they do, they are lying!  Investing requires risk.  That risk is a potential loss of your investment, especially in the short-term.  Could you handle the possibility that your savings for your down payment might be worth less when the time comes to buy that house?

Bottom line – the markets are no place for short term savings!  Keep your short-term savings in a liquid guaranteed bank account.