Have you used a 1031 Exchange before in the past or are thinking about using one now?
There’s no denying that now is a great time to buy rental property in Portland Oregon especially since rents have continued increasing across Portland and with mortgage interest rates still historically low there’s never been a better time than right now to buy that duplex, condo, townhome or apartment building you’ve been thinking about and a 1031 Exchange will save you from having to take a tax hit.
What Exactly Is A 1031 Exchange?
With a 1031 Exchange you have the ability to sell one asset and buy another similar asset; deferring any capital gains tax that you would normally have to pay once your transaction was complete.
Although 1031 exchanges work great for deferring the tax hit that you can expect to pay right now the reality is that they do come with requirements that have to be met including:
You must purchase a “like kind” replacement property. This means that if you sell a vacation home worth $500K you must purchase a similar property for the same amount.
The In’s And Out’s Of 1031 Exchanges
Be Careful How You Pay For Closing Costs
The IRS sets special rules when you use proceeds from the sale of the old property to pay closing costs on the new one.
The costs must be “normal transactional costs.” These mortgage closing costs are not considered normal costs for tax purposes:
- Lender charges
- Lender’s title insurance
- Mortgage insurance (upfront premium)
You’ll need to pay these costs from other funds, have the seller cover them, or choose to have the lender cover them via a no-closing-cost mortgage.
Who Is On The Property’s Title?
Residential mortgage lenders typically do not make loans to living trusts, revocable trusts, LLCs or partnerships.
The property title and the loan will need to be in your name, however the title can be changed later with no tax consequences to you.
Make sure that transferring the title back to your business entity or trust won’t trigger a due-on-sale clause with your lender.
Property Status Is Important
Some buyers try to pass off an investment property as their primary residence.
That’s a bad idea for a lot of reasons, but especially in the case of a 1031 exchange.
Underwriters know these transactions are for investment property only, and your lender will not fund the loan if you misrepresent the property use.
Trying to pass off a 1031 property as a primary residence is a rookie mistake by which more seasoned investors aren’t even tempted.
Set a Timeline For Your Sale And Purchase
The IRS imposes very strict target dates and accepts no excuses.
Mortgage problems can cause you to miss your 180-day deadline for closing on the new home. In that case, your tax savings would evaporate. Minimize the odds of missing the window.
- Get pre-approved for your mortgage before selling the existing property
- Keep your loan file updated with recent income and asset documents
- Use a reputable Qualified Intermediary for your 1031 exchange
- Respond to all requests from your lender and your intermediary
- Don’t apply for new credit
A 1031 exchange allows smart real estate investors to defer taxes and create more cash flow. However, check with a tax adviser before filing, as there are caveats and exceptions to any portion of the tax code. Only an expert is qualified to give tax advice.
Did You Know This About 1031 Exchanges?
1031 exchanges are nothing new — in fact, they’ve been around for nearly 90 years. However, recent innovations are leading to custom solutions for high net worth investors that you may not have thought possible. A few examples include:
Investors with more than $250,000 of 1031 equity can now reinvest in individualized portfolios of institutional-quality properties offering long-term, tax-advantaged, passive income.
- Investors with more than $1 million of 1031 equity now have the option to pull out up to 90% of their equity after completing a 1031 exchange and use it any way they wish, without triggering capital gains tax consequences.
Investors with more than $10 million of 1031 equity now have custom ‘parking’ solutions that give them years, not months to find replacement properties.
Get Portland Property Management
For professional Portland Oregon Property Management contact Property Management Systems today by calling us at (503) 515-3170 or click here to connect with us online.