Springfield & Eugene 1031 Exchanges
Passive Tax Strategies to Defer Capital Gains
See if passive real-estate ownership is right for you
*The content on this page is for educational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional before initiating a 1031 exchange.
1031 Exchange Basics
A 1031 Exchange may help you defer tax on your capital gains!
Why People in Oregon Use 1031 Exchanges
1. Dealing With Tenants
From collecting rent, to dealing with vacancies and repairs, being a landlord isn't what it used to be. Real-estate is active investment of time and money.
2. Concentration Risk
There is risk in concentrating your investment portfolio in one or only a few properties. Diversification is challenging with current market prices.
3. Tax Burden on Exit
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Many real-estate owners depreciate their properties, which lowers their cost basis, but leaves them with a potentially large tax bill upon the sale.
1031 Exchange Process & Timeline
A 1031 exchange is a tax break that allows you to sell a property held for business or investment purposes and swap it for a new one that you purchase for the same purpose, allowing you to defer capital gains tax on the sale.
Source: IRS Form 8824 instructions
1031 Exchanges: The Details
"Like-kind" refers to the tax concept allowing tax-deferred exchanges of similar assets held for business or investment purposes.
Like-Kind Properties
A QI is utilized during a 1031 exchange to ensure adherence to IRS regulations and enable a seamless and valid property exchange, thereby preserving the tax-deferred status.
Must use a QI
You must identify potential replacement properties within 45 days of selling and acquire the new property within 180 days to maintain eligibility for tax deferral.
Abide by Timeline
Qualified Intermediary
A qualified intermediary is a third-party entity that facilitates the exchange of assets or funds between parties while ensuring compliance with relevant legal and regulatory requirements.
Starting a 1031 Exchange
You must begin the 1031 process before the initial property is transferred. Meaning you can't have the sale proceeds ever deposited directly into your bank account.
Problems with Traditional
1031 Exchanges
A successful traditional 1031 Exchange can be quite a challenge to pull off these days.
Finding Replacement Property
A replacement property must be identified within 45 days after the sale of the initial property and can be difficult in a low-volume market.
"The Boot"
If the property is sold for more than the cost of the new investment, the remaining value is considered "The Boot" and is taxable.
Active Management & Risk
A traditional 1031 exchange replaces one direct-ownership headache with another. The investor still handles tenants, maintenance, and turnover on the replacement property.
A Problematic Example
Imagine a retired Oregon couple, let's call them James & Laura, decided to use a 1031 Exchange when selling their lone rental property. The rental was falling apart and was too much work for James and Laura.
The original property was bought in 1990 for $100,000 and depreciated down to a zero cost basis. In a low-volume market, James and Laura broadened their search and identified a replacement for $250,000. They initiated the 1031 exchange, and the original home sold for $300,000 in 2020. The $50,000 difference between the sale price and the replacement cost became "boot," which is taxable. The couple owed roughly $7,500 in federal capital-gains tax on the boot, plus state tax in some scenarios, an outcome they had not planned for at the start of the exchange.
T. Mann Financial Solutions
1031 exchanges into passive real-estate ownership
Passive Real-estate May Solve the 3 Problems
Finding Replacement Property may be Streamlined
Identifying a replacement within 45 days may be easier when working with a registered investment adviser like T. Mann Financial, which can help evaluate options and coordinate with a qualified intermediary.
"The Boot" and Related Taxable Event may be Avoided
Some passive real-estate investments allow investing in small increments that may possibly eliminate "The Boot" and the related taxable event.
Passive Ownership & Increased Diversification
Passive real-estate ownership eliminates the need to directly deal with tenants or maintenance and potentially allows for greater diversification across industries.
T. Mann Financial's 2 Passive 1031 Options
* You must be an accredited investor to utilize these solutions.
Check here to see if you are an accredited Investor.
Delaware Statutory Trusts (DSTs)
Long-term tax deferral strategies for accredited investors.
Truly Passive Real-Estate Ownership
DSTs are passive real-estate investments that use a 1031 exchange to defer capital gains and involve long holding periods.
Qualities of DSTs
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DSTs are established by real estates companies who build a portfolio of properties that individuals may invest in.
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DSTs allow for fractional ownership, also known as beneficial interest, which qualifies as a replacement property in a 1031 Exchange.
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Like traditional real-estate, investors may receive benefits monthly as rents are paid.
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Unlike traditional real estate, these investments are designed to be passive at the investor level and are managed by the trust's sponsor and professional asset managers.
Common Delaware Statutory Trusts investments include:
Multi-family housing, self-storage, healthcare, commercial, distribution centers, & industrial
UpREITS
Similar to DSTs, UpREITs are long-term tax deferral strategies for accredited investors.
However, UpREITs are organized differently and allow for a second (721) exchange.
Investing in an UpREIT may offer benefits such as potential tax deferral, broader diversification across the REIT's portfolio, and professional asset management, with the trade-off of giving up future 1031 exchange flexibility.
A More Flexible Investment Approach
DSTs are passive real-estate investments that use a 1031 exchange to defer capital gains and involve long holding periods.
Qualities of UpREITs
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UpREITs enable Section 721 exchanges within the Real-Estate Investment Trust, which are intended to provide investors with the opportunity to defer payment of capital gains taxes.
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UpREITs allow for real estate to be exchanged for ownership shares.
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When you engage in the UpREIT process, you no longer own real estate. The securities gained in this exchange can not be used in a 1031 Exchange into other real estate.
Accredited Investors
An accredited investor is someone who may invest in private securities that may not be registered with the U.S. Securities and Exchange Commission (SEC).
Accredited Investor Requirements:
1. Annual individual income of at least $200,000 or $300,000 if married filing jointly.
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2. A net worth of over $1,000,000, excluding the value of the primary residence.
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3. Financial sophistication, extensive experience or certifications related to investments.
1031 Exchanges In Oregon
The state of Oregon has passed legislation to address the roles of 1031 Exchanges
Oregon House Bill 3484
What Does This Mean?
Exchange Facilitator Restrictions
Oregon House Bill 3484 illustrates requirements for Exchange Facilitator (EF is Oregon's term for a Qualified Intermediary) during the 1031 Exchange process. They must maintain $1 million fidelity bond or $1 million deposit with a financial institution while having an errors and omissions policy of minimum $250,000 (ORS 316.738 & 317.327)
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Providing false information or misrepresenting facts with the intention of deceiving a client.
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Failing to account for money or property within a reasonable time frame.
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Engaging in fraudulent or dishonest conduct, including committing crimes such as fraud, misrepresentation, deceit, embezzlement, misappropriation of funds, robbery, or theft.
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Failing to fulfill contractual obligations (ORS 316.738 & 317.327)
Oregon "Clawback" Tax
Make sure your replacement property is in Oregon or you might be subject to the clawback tax.
"Clawback" tax comes into effect when there is a gain as an Oregon property is sold and is replaced with an out of state property. In this case the state of Oregon requires tax payers to file an annual report with the Oregon Department of Revenue (ORS 316.738)