Tom St. Jean
Senior Vice President and Director of Specialty Deposits, Brookline Bank
Age: 50
Industry experience: 28 years
Tom St. Jean has spent almost 18 years focusing on a single section of the tax code: Section 1031. The code allows taxpayers who sell investment and other types of property to defer capital gains by reinvesting in real estate – as long as they follow all the rules. With about a decade of banking and real estate experience, St. Jean took a job processing 1031 exchanges in 2002 and has worked on these real estate transactions ever since.
His four-person team at Brookline Bank, where St. Jean has worked since 2013, has customers in eastern Massachusetts and across the U.S., ranging from institutional real estate investors to business owners to a person selling an investment condominium. The group processes about 300 1031 exchanges for 600 transactions annually, with volumes ranging between $1 billion and $2 billion.
Q: What is the purpose of 1031 exchange?
A: The concept behind having 1031 in the tax code is to allow and to promote transaction activity and velocity and capital investment. If you think about it, without 1031 there’d be far fewer real estate transactions and sales. By allowing people to change investments – going from one office building to another – that creates transaction velocity and economic growth on many levels.
Q: What are the benefits of 1031 exchanges?
A: Not having to pay the tax or deferring the tax is the number one benefit. But it can be used to diversify. We have clients who will sell one large asset and diversify into several others. We have other customers who will do the opposite. They’ll sell many smaller assets and buy one larger one to consolidate. There are times where people have undeveloped land that obviously creates no cash flow, and they can trade that into income–producing property.
Another thing 1031 is used for is leveraging. If you were to sell real estate, pay the tax and then reinvest, you have less money to reinvest, less money to leverage with debt. So by doing a 1031, you can take what otherwise would have been paid in taxes, leverage that with mortgage debt and grow a portfolio.
Sometimes we see people who have a portfolio of rental apartment buildings or units and at the time of retirement they’re not interested in actively managing. We see people sell that and buy into a more passive investment like a triple net lease property – a CVS drugstore would be a good example of that. And then people will also use 1031 for estate planning. Because when you sell property after it’s gone into someone’s estate, you receive a step–up in tax basis, so the estate no longer has to pay the capital gains tax. Rather than doing a taxable sale in the twilight of your years, we see people do an exchange and let the benefit of the exchange accrue to their estate.
Q: What is your role in the exchange?
A: One of the requirements of Section 1031 is that you use a qualified intermediary. So that’s what my group at the bank does. We prepare the exchange documents that are required by the regulations, and we hold the net proceeds of the sale in escrow. Another requirement of Section 1031 is that the taxpayer can never touch the cash, and so that’s the blocking and tackling of what we do. Around that we advise our clients as to what the requirements are, we help them understand if their transaction qualifies. We help them avoid some of the pitfalls. We have many customers who do repeat exchanges over and over again, but often it’s our customer’s first time doing an exchange. My group has the benefit of just doing 1031 exchanges every day all day, so we try to bring that knowledge and experience to share what we’ve seen with our customers.
Q: Are there challenges to a 1031 exchange?
A: The greatest challenge in this market is finding what you’re going to buy. One of the requirements for 1031 is that you have to identify in writing what you might buy by the end of the 45th day following the closing on your sale. In this market, where generally speaking it’s easier to sell than to buy, that time requirement is often difficult to meet. And unfortunately there’s no extension – it’s a hard and fast time requirement. Then the other time requirement is that you need to close on your new property within 180 days. That’s not as difficult to meet once you’ve found what you’re going to buy, but certainly that’s one of the challenges in doing a 1031.
Q: Is there an awareness gap about 1031 exchanges?
A: There’s probably a larger knowledge gap than there is an awareness gap. If you’re talking about larger real estate investment companies, most of them are aware of 1031. The people who maybe aren’t as aware are the business owners who own real estate used for their business or the retail real estate investor who owns a few condos. But there’s a knowledge gap at every level because it’s such a niche part of the tax code that if people are aware of it, they’re not necessarily aware of all of the intricacies.
Q: What do you enjoy about working with these exchanges?
A: I spend most of my day explaining 1031 to people. It could range from an individual who’s selling their one asset, and it’s the greatest investment they have. It’s very important, and I enjoy explaining 1031 and advising them. But it’s true of larger transactions. We have customers that are large real estate investment companies with tax counsel and CFOs, and we can add value in those conversations as well because we do 1031 every day. We can point out nuances that might save an exchange or improve an exchange. I just enjoy being in those conversations.
St. Jean’s 5 Favorite Activities Away from Work
- Spending time with his family.
- Watching his four children perform in sports, drama and music.
- Cheering for Boston sports teams.
- Playing golf.
- A Sunday afternoon nap.
