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Springfield & Eugene 1031 Exchanges:
Passive Tax Strategies to Defer Capital Gains
See if passive real-estate ownership is right for you
*The following is for educational purposes only and should not be considered as tax advice.
1031 Exchange Basics
A 1031 Exchange may help you defer tax on your capital gains!
Three Real-estate Headaches
There is risk in concentrating your investment portfolio in one or only a few properties. Diversification is challenging with current market prices.
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 Exchanges to the Rescue
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.
1031 Exchange Process
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.
Problems with Traditional
1031 Exchanges
A successful traditional 1031 Exchange can be quite a challenge to pull off these days.
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.
If the property is sold for more than the cost of the new investment, the remaining value is considered "The Boot" and is taxable.
In traditional 1031 exchanges you could remain actively dealing with tenants and maintenance. You also could still have concentration risk.
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 $100K and over the years was depreciated down to a zero cost basis. They struggled finding a replacement property due to the low-volume market, but the couple lowered their standards and luckily managed to identify a property for $250K. They then initiated the 1031 Exchange process. The original home sold for $300K in 2020, leaving them with a "boot" of $50K. They spent the money on a vacation and were surprised by their accountant when they had to pay pay capital gains tax on the boot amounting to almost $7,500. James had to pick-up a part-time job just to pay for the tax bill and the new roof they needed after a brutal hailstorm.
T. Mann Financial Solutions
1031 exchanges into passive real-estate ownership
Passive Real-estate May Solve the 3 Problems
Identifying a new investment within 45 days may become much easier when working with a fiduciary financial planner like T. Mann Financial.
"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 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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However, unlike traditional real-estate these investment are 100% passive and are managed by teams of professionals.
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 potentially offers benefits such as tax deferral, greater diversification, and access to a larger pool of high-quality real estate assets that are professionally managed
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 Securities Exchange Commission (SEC).
Accredited Investor Requirements:
1. Annual individual income of at least $200,000 or $300,000 if married filing jointly.
2. A net worth of over $1,000,000, excluding the value of the primary residence.
3. Financial sophistication, or extensive experience/ 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
Clawback Provision
Oregon House Bill 3484
What Does This Mean?
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)
Exchange Facilitator Restrictions
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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)