It’s a new year, which means that tax season approaches rapidly. While you’re getting all of your documentation together to complete your returns, we want to help make sure you’re taking advantage of all available deductions and deferrals!
One interesting option for capital-gains tax deferral? The 1031 exchange, which allows investment property owners to sell their rentals, commercial properties or investment land in exchange for the purchase of a “like-kind” property while deferring the capital-gains tax from that sale.
Our office, RE/MAX Equity Group – Broadway in Portland, Oregon, recently hosted Tojia Beutler, a local Portland attorney and owner of the Beutler Exchange Group, for a lunch-and-learn session on 1031 exchanges. Tojia provided a lot of insight on this useful capital-gains tax deferral strategy, and we think it’s worthwhile for our clients to be aware of this option. Check out this overview of 1031 exchanges to see if they could benefit you now or in the near future:
What is a 1031 Exchange?
If you’re already an investment property owner, you likely know that the revenue we generate from investments is taxed separately from our income tax. This separate tax is known as capital-gains tax. The 1031 exchange allows investment property sellers to delay paying taxes on that sale.
It’s important to note that there are very specific requirements that allow investment-property sellers to benefit from a 1031 exchange. This procedure is outlined in Section 1031 of The U.S. Internal Revenue Service Code, which is how it gets its name—Section 1031 allows for the “exchange” of two like-kind investment properties without the immediate application of capital-gains tax.
One important foundational aspect of the 1031 exchange—and the reason the word “exchange” is used in the first place—is that investors must use the proceeds from the sale of their existing property to finance the purchase of the new property. And that property must be of “like-kind” to qualify.
This means, broadly, that you’ll need to “exchange” one piece of real property for another, but it doesn’t necessarily mean that you need to buy properties of the exact same type or value. It simply limits qualifying transactions to those concerning real estate.
I Sold an Investment Property This Year—Do I Qualify?
According to the information Tojia provided at our informational session, it’s important to enter into an investment property transaction knowing that what you’re doing will qualify for capital-gains deferral under Section 1031. In other words, it’s best to start working with the Beutler Exchange Group before you sell your investment property.
The IRS has very specific requirements that determine which transactions qualify as a 1031 exchange, and the Beutler Exchange Group’s 1031 checklist includes verifying that both the property you’re selling and the new property you’re purchasing qualify. Still, it’s worth exploring with Tojia and her team to see what you might be able to do on your upcoming tax return.
If you’re a current investment property owner who’s considering selling in order to buy a new investment property, you’ll want to do more than just get in touch with us to help facilitate your sale and new purchase. You’ll also want to get started with the Beutler Exchange Group before you sell to make sure you’re checking all the right boxes to qualify for this capital-gains tax deferment. Tojia and her team are happy to answer questions and give more detailed information on 2031 exchanges and how they can benefit you—connect with them now!