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Escaping the Crazies through 1031

  • By: B. Craig Gourley
  • Published: November 1, 2019

If you are like most landlords, the constant invasion upon our property rights by over-reaching government is pushing you close to giving up on residential rentals.

The problem is that if you sell, you lose a huge portion of your profit to taxes. There is a reasonable alternative. You can exchange your investment through a 1031 exchange into a more landlord-friendly jurisdiction without paying any federal tax.

If you own property in one of the jurisdictions that thinks you should personally bear the burden of housing shortages and irresponsible tenants, it may be time to move your investments to a more friendly environment. I personally still believe in residential rentals as a sound investment, but when a market becomes unprofitable or regulation too burdensome, it’s time to move my investments.

One of the many uses of a 1031 exchange is to make geographic changes in your investment portfolio. Housing prices are currently at an all-time high, particularly in those over-regulated areas.

By using a 1031 tax-deferred exchange you can sell your current rental property and acquire a new rental property in a less regulated area. For example, if you own a rental house or apartment in Seattle where tenants have all the rights, you can move that investment to some place like Snohomish County or Eastern Washington, where at least today, you can actually choose who lives in your unit.

By structuring the transaction as an exchange, you will pay no federal tax.

Section 1031 exchanges are easy, but in this market I suggest a little bit of planning.

From your standpoint it is just like a normal sale and repurchase; however, there are strict timelines and your funds must be held by a Qualified Intermediary between the sale and the reinvestment. Once you close on your sale, you have 45 days to identify the property you are going to acquire, and 180 days to actually be in title.

This being a seller’s market, I suggest that you start looking for your replacement property when you list your current property or even before.

Section 1031 exchanges are also called “like-kind” exchanges and I am often asked what kind of property is considered like-kind. The short answer is that any real estate is like-kind with any other real estate.

You can sell a single-family house and buy a multifamily project, a commercial property or even a condo.

You can dispose of a large project and acquire several smaller ones or dispose of several smaller projects and consolidate into a larger property.

You can even acquire a partial interest, like an undivided 50% interest in a larger project, as long as it is properly structured.

Besides escaping the crazies, it may be an opportunity to diversify or consolidate your holdings.

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