Rachel McLaughlin, exchange facilitator with Cascade Title Company, examines the reasons to do a 1031 exchange, the benefits, and the steps of a successful exchange. If you’re a multifamily property investor and considering a switch into commercial real estate as a result of Oregon Senate Bill 608, understand the options available to you with an exchange.
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Why 1031 Exchange?
There are a number of reasons to do a 1031 exchange. If you plan to reinvest into real property, a 1031 exchange allows you to defer capital gains and reinvest all funds into a new investment property—instead of paying taxes upward of 35 percent in federal and state taxes.
To use some easy numbers, consider this example: If you purchased for $100,000 and then you sell for $300,000, you have $200,000 in capital gains. You could pay as much as 35 percent of that $200,000 is in taxes: That’s $70,000 off to the IRS. But if you plan to reinvest into your portfolio and move into a new investment in real property, you could participate in a 1031 exchange and take that $70,000 and defer it and push it forward into your portfolio instead of paying it.
A 1031 exchange allows you to keep rolling from investment to investment without realizing any gain, keeping your money and your investment portfolio rather than paying capital gains on each sale. This can help you build your portfolio as you go along.
Steps in a 1031 Exchange
The first step in a 1031 exchange is to gather the team that will work on this transaction with you. Your CPA knows your tax situation and should definitely be a part of your team. They know what your basis is in your property and you would have to meet in order to do a 1031 exchange—what you would have to purchase to be fully tax deferred. You also want to call your broker and your qualified intermediary, which is me. Those are good people to have in your corner to put together a good plan for you.
The next thing to do is create an investment plan; having a plan ahead of time benefits you. There are some very strict timelines that you have to stick to when you do a 1031 exchange. The IRS is not lenient on those timelines, which is why a plan is needed. By planning I mean you start figuring out where you want to invest, what you want to get into, and start looking at properties.
The next thing is you would list your relinquished property, which is your down leg. That’s the property that you own. You want to get that listed. Once you have a buyer, you are going to start shopping for your replacement property. Some people don’t like to do this until they close on their relinquished property because they really want to know that that those funds are going to come in and they’re guaranteed. I like people to get out and start shopping ahead of time because It extends your timeline, which works to your benefit.
“Once you’re under contract on your sale, you want to start looping in your qualified intermediary to make sure everybody is on the same page. The qualified intermediary works with escrow. You also want your escrow team to know that you’re doing an exchange. It changes the way that all of your escrow documents are written up. It changes the way the deed is drawn. You want everybody to be on the same page.”—Rachel McLaughlin
The next thing to do is identify your replacement property or properties because you can purchase more than one if you’d like. You have to do that within 45 days of your date of sale. Your date of sale is the day that the deed records on your relinquished property. That starts your timeline for everything in your exchange. You have 45 days to identify what you’d like to purchase and then you have 180 days, which is about six months, to close on that purchase.
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.