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Capital Gains Tax & 1031 Exchanges

Updated: Jun 8, 2022

Dear Shanon, I want to sell my rental property but I’ve heard that I will be taxed on the gain. Is that true? How much will I have to pay?


The Internal Revenue Service (IRS) and the Oregon Department of Revenue assessed a capital gains tax on the sale of investment property. I sat down with Tax Specialist, Esther Auerbach who says that "While an individual’s actual tax liability varies and can only be determined by a tax professional, in general, the combined Federal and State capital gain tax in Oregon is 31%, making it the third-highest in the nation. Additionally, any depreciation taken will be recaptured and will be taxed at the rate of 25%."

However, under the provisions of the Internal Revenue Code (IRC) 1031, capital gains taxes can be deferred. The IRS provides that:

No gain or loss shall be recognized on the exchange of property held for productive use in

a trade or business or for investment, if such property is exchanged solely for property of

like-kind which is to be held either for productive use in a trade or business or investment.


In addition to adhering to very specific parameters and timelines, the IRS also requires that a Qualified Intermediary be used to facilitate the exchange. To get a better understanding of the 1031 Exchange, I sat with Esther Auerbach, a local 1031 Exchange Facilitator with Old Republic Exchange to identify some of the pros and cons.

Pros:

· Reinvestment into replacement property allows taxpayers to leverage dollars that would otherwise be spent on taxes

· Allows for non-income producing property to be replaced with income-producing property

· Allows taxpayers to diversify portfolios and minimize risk

· Taxpayers can relocate an asset by exchanging it for a more convenient location.

· Taxpayers can switch from one type of investment property to another, such as residential to commercial or vice-versa.


Cons:

· Taxpayers cannot have actual or constructive receipt of sales proceeds – hence the need for a Facilitator.

· There is additional documentation required – which the facilitator prepares and coordinates with the Real Estate Agent and Escrow Officer-involved

· Taxpayer must identify the replacement property(ies) within 45 days from the sale of the relinquished (old) property

· All replacement property(ies) must be acquired and closed within 180 days from the sale of the old property.

· Taxpayers cannot switch properties after the 45th day has passed.


It is important to remember that a 1031 Exchange must be set up before closing on the sale of the relinquished property. Once the sale has closed, it is too late to do an exchange and the capital gains taxes must be paid.


Esther Auerbach can be reached at 541-708-6228 or eauerbach@orexco1031.com for more information.


Published article Medford Sneak Preview September 2017









Shanon Pewtress

Real Estate Broker, Licensed in the state of Oregon

Published September 17, 2017


Shanon holds an MBA in International Business, loves writing in her “At Home with Shanon” column that has been delivered to 47,000+ homes in Medford since 2014, has appeared on the Real Estate Radio Show, and was also featured on A&E TV network’s Real Estate Reality TV show.


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