Oregon 1031 Exchange: All You Need to Know
Real estate investments in Oregon can defer capital gains taxes on the sale of one or more of their properties by performing a 1031 exchange rather than a standard property sale. Several conditions must be met to successfully make a tax-deferred exchange, and failure to meet the requirements will result in the disqualification of the exchange and the immediate assessment of capital gains taxes on the proceeds of the sale.
In this article, we’ll look at the specific rules for completing a 1031 exchange in the state of Oregon.
What is a Section 1031 Exchange?
In December of 2017, the Tax Cuts and Jobs Act (TCJA) was passed by Congress, which narrowed the scope of 1031 exchanges. Previously, personal property such as franchises, equipment, and even aircraft was eligible for 1031 exchanges, but not so after the passage of the TCJA. Now, 1031 exchanges are limited to real property or real estate as defined by the IRS.
The seller has 45 days from the sale of the relinquished property to identify suitable replacement properties and 180 days from the sale date to close the purchase of the replacement property. A qualified intermediary (referred to as an exchange facilitator or EF in Oregon) must be used to facilitate the exchange and handle the money transfer.
Changes to 1031 Rules
In December of 2017, the Tax Cuts and Jobs Act (TCJA) was passed by Congress, which narrowed the scope of 1031 exchanges. Previously, personal property such as franchises, equipment, and even aircraft was eligible for 1031 exchanges, but not so after the passage of the TCJA. Now, 1031 exchanges are limited to real property or real estate as defined by the IRS.
The seller has 45 days from the sale of the relinquished property to identify suitable replacement properties and 180 days from the sale date to close the purchase of the replacement property. A qualified intermediary (referred to as an exchange facilitator or EF in Oregon) must be used to facilitate the exchange and handle the money transfer.
Special Rules for Depreciable Property
When the depreciable property is included in a 1031 exchange, a depreciation recapture can be triggered, which is taxed like normal income. To determine if there will be depreciable property involved in your 1031 exchange, contact us at TFS Properties or speak with your tax professional.
Special 1031 Exchange Rules in Oregon
Oregon House Bill 3484
House Bill 3484Â clarifies the role of exchange facilitators: they must maintain a $1 million fidelity bond or a $1 million deposit with a financial institution, and maintain an errors and omissions policy of at least $250,000. They must also follow prudent investment standards and they are prohibited from making false statements, engaging in fraud, or failing to complete their contractual duty.
Oregon Clawback Provision
The Oregon clawback provision comes into play when the replacement property in a 1031 exchange is outside the state of Oregon. In this instance, taxpayers must file an annual report with the Oregon Department of Revenue and pay state taxes.
Who Qualifies?
Individuals, LLCs, C and S corporations, general or limited partnerships, trusts, and any other tax-paying entity that owns investment or business property is eligible to conduct a 1031 exchange, according to the IRS.
What are the Benefits of a 1031 Exchange in Oregon?
1031 exchanges allow Oregon real estate investors to defer capital gains taxes, trade-up their real estate holdings to those with greater income potential, diversify their portfolios, plan their estates, and reduce or eliminate active management duties by swapping for lower-maintenance property types.
How Has COVID-19 Impacted Oregon Real Estate Markets?
While COVID-19 has caused widespread problems throughout the real estate industry and the world at large, the Oregon real estate market is still strong and will likely only experience an upturn from here on out since it’s more affordable than other Pacific coast real estate, has a generally highly educated labor force with high incomes, and major employers in the state are growing and expanding commerce.
But, the pandemic is a good reminder to keep your portfolio diverse and not to focus too heavily on any one type of investment property.
How Do I Know if a 1031 Exchange is Right for Me?
1031 exchanges have many benefits, but they are not appropriate in all situations. Examine your objectives, financial situation, and tax liability if you were to go ahead with a 1031 exchange and consult with your accountant and/or your tax professional. Keep in mind that even if you temporarily defer capital gains taxes on the sale of a property, you may eventually have to pay as much as 38.7% on the sale of investment property.
1031 Exchanges for Vacation Homes
Some less scrupulous investors used to exploit loopholes in the 1031 exchange provision, swapping one vacation home for another and then ultimately moving into the new property and making it their primary residence, using the $500,000 capital gain exclusion to avoid paying capital gains taxes. However, this loophole was tightened in 2004 so vacation homes must be rented out for a significant portion of the year and at least two years to be considered a true investment property and avoid disqualifying the 1031 exchange.
Moving Into a 1031 Swap Residence
If you do choose to move into a 1031 exchange residence and make it your primary residence, you can’t do so immediately after the exchange or you’ll have to pay capital gains taxes.
To avoid this, for two years after the exchange, you must rent the property to another party for fair market rent for at least 14 days in each one year, and you can’t use the property for personal use for more than 14 days or 10% of the number of days that it was rented out within one year.
Beware of Schemes
Improper use of 1031 exchanges in Oregon is not allowed, and all investors should beware of those who promote 1031 exchanges as tax-free rather than tax-deferred. It’s always a good idea to consult your accountant, tax professional, or our team at TFS Properties for professional advice.
Ready for a 1031 Exchange?
Contact an Oregon 1031 exchange expert today for a free consultation.
