The 1031 Exchange and the Increasing Capital Gains Tax

Our next podcast series has arrived!

This series focuses on the proposed legislation changes we’re looking at in investment real estate. Listen in as Marcia and I take a look at how it would affect the 1031 exchange.

René Nelson, Eugene commercial real estate broker
Marcia Edwards, Eugene residential real estate broker

Legislative Changes in Real Estate – Part 1

Marcia Edwards: Well, let’s talk a little bit about what’s coming down the pike legislatively. I knew there were going to be changes with the change of the administration at the federal level. Let’s talk about what we see, how it will reflect in real estate.

René Nelson: Okay, so President Biden is proposing some new rules for capital gains. Investors use 1031 tax deferred exchanges to buy and sell real estate and keep that money tax deferred. President Biden is proposing to increase capital gains from 20% to 40% with profits that exceed over $500,000.

Marcia Edwards: So let’s break this down. Capital gains, define that.

René Nelson: Okay. So capital gains are when you sell a rental property. So if you have not lived in it. It used to be two out of the last five years, but now most CPAs say three out of the last five years. If you have a rental property and you sell that, in the past, you could exchange all that profit forward into a new property, and I’ve got an example that I’ll share with you, but you basically could sell a property and roll all that money forward into a new property, but now if that profit exceeds 500,000, he’s going to basically tax you at 40%.

Marcia Edwards: So the gain is the benefit, the financial upside of your property investment, and that benefit is going to be taxed at 40%?

René Nelson: Yeah. Let me give you an example. If you’re an apartment complex owner and you own something at 1.2 million, but you originally purchased it for 500,000, under the current law, the owner could exchange for a like and similar property, so you could go into an investment property, and you could defer that $700,000 of profit into a new property.

Marcia Edwards: So you’d scoot it over and it would not be taxed as an event at that time, but deferral means it will be taxed eventually?

René Nelson: Yes. And normally what people would do is they would just pass that on to their heirs. So the new law that will be changing with the capital gains, on that $700,000 profit, if you paid a 40% tax rate, your capital gains on that $700,000 profit would be $280,000.

Marcia Edwards: Isn’t that fascinating? That’s a big deal.

René Nelson: It is.

Marcia Edwards: So let’s talk next program about how to plan for this and how to build up your defense to this situation if you’re an investor.

René is available to answer your real estate investment questions. Schedule a 15-minute discovery call to better understand your investments and the market today.

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