Rachel McLaughlin, Exchange Facilitator with Cascade Title Company, looks into the benefits of a doing a 1031 exchange. She explains the terminology involved to help you become a more informed investor. In light of Oregon Senate Bill 608, know your options even if you don’t plan on making any changes right now.
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Even if you don’t plan to use or participate in an exchange right now, this is good information to keep in your back pocket so that you are familiar with exchanges and know what your options are going forward.
1031 Exchange Vocabulary
Let’s go over some exchange vocabulary.
First, we have relinquished property. This is the property that you would be selling, also known as the up leg of your exchange. There’s a replacement property, which is exactly what it sounds like. It’s the property that you’re going to replace your relinquished property with. That would be the down leg of your exchange.
“We have something called boot. Boot is the money that you don’t spend when you’re doing the exchange. Your goal in a 1031 exchange is to go equal or up in value when you purchase. If you do not go equal or up in value, that remaining amount is boot, and that is what is taxable. For a quick example, let’s say you sold for $250,000, and then you purchased for $220,000. That 30,000 that you did not go equal or up in value is boot, and that is what your taxed on.” —Rachel McLaughlin
We have capital gains. You are probably familiar with capital gains. To find it you take your purchase price, what you purchased the property for, and then you subtract your sales price. That amount there, basically your equity, is capital gains, and that’s the amount that you would be taxed on if you were not to do an exchange.
We’ve got a list of names here: Qualified intermediary exchange coordinator, exchange facilitator or a QI. QI is short for qualified intermediary. Those are all names for me, and I’ve been called much worse, so I’m not offended by any of those.
And then the last one we have is a safe harbor. This is basically a list of rules that the IRS has put forward and said, “If you follow these rules, we won’t audit you.” Of course everyone wants to stay on the right side with the IRS.
If you need help with a 1031 exchange, contact Rachel McLaughlin, Exchange Facilitator.
Do you want to learn more? Visit Pacwest Commercial Real Estate’s Oregon Rent Control Central for the latest information.
Due to the complex nature of these changes, Landlords should contact an attorney with any questions or clarification of Oregon Rent Control SB 608.