Dear Claire: What is a 1031 Exchange?

Navigating 1031 Exchanges: Understanding the Basics of Tax-Deferred Property Transactions

I’m talking to you today because you’ve had a lot of questions about 1031 exchanges. The quick explanation is that a 1031 exchange is a way to sell a property, not pay capital gains taxes on it, and buy another investment property. There are a million (and I’m not even exaggerating) rules about doing this so it is super important that you talk to a CPA or and an exchanger. I can make great recommendations for both. There are a couple of very simple rules that you should know. If you’re selling a 5-lex or 30-plex or a 100-plex, you can exchange into a land, a property (like a house), or another 100-plex. Like property for like property – and that pretty much just means any real estate. You cannot live in it. It has to be an investment property when you sell it and then an investment property that you purchase. That gives you an advantage in avoiding a huge amount of capital gains tax. The federal capital gains tax is 15%, at least, and then Oregon has a capital gains tax of an additional 9%. To make the numbers easy, a $100k hundred grand on a sale, you’re going to pay $24,000 in capital gains tax, and that actually is probably way more because they are bunch of other things you have to recapture.

In short, if you have an investment property, you should talk to an agent that has this type of experience before you sell it. If you put it into contract that you’re selling your four-plex and then you close, if that money comes anywhere close to your hands you cannot exchange. So it’s a big deal. I’ve had people call me two days before closing and it’s a nightmare, but we can make it happen, but don’t let it close because you can’t turn back the clock.

You may not consider yourself an investor. Maybe you’re in a situation where “I bought a house when I was single, and then me and my partner we bought a second house together. Then we made my first house a rental and I want to sell it now, or a few years down the road”, you need to call me because you might have serious tax repercussions that you didn’t consider and it might make sense for you to become a landlord – not just on a single-family home, but like with multiple properties.

It can be super complicated and I’m happy to talk you through it. It’s the IRS, and tax law is very hard to understand. We have people that can help. I will look forward to talking to you next Tuesday. Take care.

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