Did you know that you don’t pay capital gains and have no need of a 1031 Tax Exchange on your primary residence in most cases. We’ll talk about that and more myths surrounding these two tax “programs” coming up (here’s a hint: they’re better than most people realize).
Deferred Taxes in Real Estate Transactions
Hey, it’s your favorite local realtor, Eren Millam with Premiere Property Group, LLC. I’ve sold hundreds of homes here in Lewis and County over the last decade and I’ve only had a few clients that ran into capital gains and didn’t qualify for a 1031 Tax Exchange. Being the analytical nerd that I am, I’ve even taken classes on the IRS code so I can provide my clients the very best representation.
What is Capital Gains?
Before we get too deep into the weeds, let’s do some definitions so everyone is on the same page. First, capital gains is a tax on the profit you make in the sale of an “investment property”. An investment property is identified as a non-primary residence. A 1031 Tax Exchange is a legal procedure where you defer paying taxes by putting them into another property or properties.
Primary Residences
Right of the bat, you’ll notice I said capital gains is tax for non-primary residences. My two clients that had to pay capital gains were because they did not live in their primary residence for 2 out of the last 5 years. That situation would also be identified as an investment property so make sure you’re there for at least 2 years. Once you’re there for at least 2 years out of the last 5, the IRS allows for an exclusion of $250,000 for single people and $500,000 for married people. This means you’ll only be taxed on profits above those amounts, so make sure you get married also!
Tax Basis
Realistically, unless you’re an investor you’ll probably never see a capital gains tax. Going just a little bit deeper, you’re even allowed to write off any improvements or expenses on the property during your ownership which will lower your basis. Every little bit helps right? A certified tax accountant can go into more detail on this.
What is a 1031 Tax Exchange?
Alright, now on to the 1031 Tax Exchange. Granted, this is a legal procedure and again, a certified tax exchange lawyer will be quite beneficial to you. I have a recommendation for you if you live in Western Washington. Essentially, you have 45 days to locate a property that is at least 95% of FMV or fair market value of the property you wish to exchange. You will have up to 180 days including extensions from closing the exchanged property to close on the new property. This is NOT in addition to the 45 days.
Like-Kind
The other stipulation is that the property must be “like-kind”, meaning similar in nature. This is where you’ll find the biggest misconceptions about a 1031 tax exchange. If the property is income producing, no matter whether it is residential, commercial, industrial, or even vacant land, it can be exchanged for another incoming producing property or properties that are residential/commercial/industrial/vacant land. For example, you can sell a rental house and exchange it for commercial building. You can even use the proceeds to purchase land and build a non-primary house on it.
Consult a Professional
The point is, there are so many moving parts to capital gains and a 1031 tax exchange that you should not try to go it alone. I would venture to guess that most real estate agents don’t even know this so you could be missing out on opportunities if you’re not working with the right people.
If you have any questions about this or anything else real estate related in Washington state, make sure you leave a comment as I answer all those personally.
Again, I’m Eren Millam with Premiere Property Group, and remember, Extraordinary Service delivers Extraordinary Results!
If you’re thinking of buying or selling your home in the west Lewis County area, contact me today! I’d love to hear from you! Eren Millam – Managing Broker Premiere Property Group, LLC WA License No. 26933
Chehalis, WA 98532 | Centralia, WA 98531 | Adna, WA | Napavine, WA | Onalaska, WA 98570 | Rochester, WA 98579 | Vader, WA 98593 | Winlock, WA 98596 | Boistfort, WA
Call/Text: (360) 219-3616 | Email: Eren@LewisCountyHomes.com
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