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Investors Should Consider 1031 Exchanges As Island County Veers Toward Restrictions On Short-Term Rental Investments.
Short-term rentals are a hot topic on Whidbey Island and throughout Island County. Even before the pandemic, in 2019, Langley, on the southern tip of Whidbey, started passing restrictions and rules for anyone hoping to turn homes or new properties into Airbnbs or other short-term rental properties. While the pandemic slowed the trend, it is picking back up again in force, as the Island County Planning Commission debated the topic as early as last August.
While no decision seems to have been made for the entire county yet, individual communities and cities like Langley are following in the footsteps of other counties and dramatically increasing the cost and hassle of short-term renting. From regulations to the need for licenses or permits, the field is shrinking fast for current and future investors. If you are one of them, you might already be looking at more favorable environments in other counties or even states.
Unfortunately, you cannot pick up the land or the property and move it out of there, and if you try to sell, you get the pleasure of paying Taxes on your gains. Which have been considerable for many owners in Island County. Fortunately, with a little help from a skilled tax attorney like Craig Gourley, you can take your money elsewhere without paying a dime in taxes today using a 1031 tax-deferred exchange.
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Island County has been a reasonably attractive, if rarely spectacular, spot for buying investment property. Values have consistently risen as demand for both long-term residencies and short-term vacation rentals climb year after year. An increasing number of these purchases or properties have been converted into Airbnb’s, especially in the southern parts of Whidbey closer to Seattle, or in the north, near Oak Harbor and the bridge over from Skagit.
But these rentals, while potentially quite profitable, have not elicited much joy from local residents and their representatives. Many seem concerned with the quality of life in their small quaint towns, while others are worried about the cost of living and rising property values and taxes. As a result, like Pacific County, Greys Harbor County and other cities and zones, the county itself is considering cracking down on short-term rental properties, which could dramatically impact their profitability.
In the Island County Planning Commission’s meeting from last August, the group examined the different types of restrictions available, and the minutes do not reveal which, if any, they plan to adopt. But even if the county does not follow in the footsteps of its neighbors, nothing stops the cities and towns of Island County from doing so on their own.
This is why it might be time to ask a lawyer about a 1031 tax exchange. Especially if you own a short-term rental property.
If all these regulations have you looking for a way out and you are already holding an investment property in Island County, you face a difficult decision. Hold on to your investment and deal with lower returns, or sell now and invest somewhere else or in a different kind of property.
If you wait until regulations show up, you may have to sell eventually anyway, as a large number of short-term rentals hitting the long-term market is going to tank rental profits as supply blossoms. Selling now, while you can still get a profit, might be the best path forward, and burying your head in the sand is not going to make the problem go away (but it might leave you holding the bill).
But selling now comes with a seemingly inescapable caveat: taxes. If your property has grown in value, you will have to pay taxes on the difference, and both Washington and federal taxes will sap away at what you are able to recover. Washington does not currently have a capital gain or income tax on the sale of real estate.
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Federal laws allow investors to make “like-kind” exchanges under the 1031 rule without having to pay income, capital gains, or state taxes on the sale of the initial property as long as the money is invested into a similar (or like kind) investment. The definition of like kind is fairly broad and permissive, allowing you a great deal of flexibility into what form your new real estate investment takes.
On the other hand, the rules for how to do so safely and without paying taxes are strict and relatively complex. You cannot hold on to any of the money from the sale and have to reinvest it quickly. As a result, the vast majority of Island County inventors will want to work closely with an experienced 1031 tax attorney.
Working out of Snohomish just across the straights and port, attorney Craig Courley Gourley has made a name for himself in the field of 1031 tax-deferred real estate exchanges. Not only has he written and spoken extensively on the subject, but he and his firm even provide the qualified intermediary service needed to smoothly and successfully continue to grow your investment using 1031 exchanges.
After all, even if you are not worried about STR rules and just want to grow your portfolio and continue to invest in larger and larger amounts of real estate and property, 1031 exchanges are an excellent way of doing so without the constant drain of state, income, and capital gains taxes.
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Ultimately, it is entirely up to you what you decide to do with your Island County investment property. Whatever you do about future STR investment restrictions in Island County is your choice to make. However, if you do find yourself considering investment elsewhere or are worried that you cannot afford to pull out now because of the tax losses, know that we can help.
Here at the Gourley Law Group, we have extensive experience helping investors throughout Washington State make sound financial decisions and providing the legal guidance to execute them, including for a wide variety of 1031 tax-deferred exchanges.
To secure a consultation and protect your investment, call (360) 323-2885 or reach out to our firm online and get the guidance and advice you and your investment need to thrive.
Call Now For Expert Assistance(360) 323-2885