Key Points:
- History and purpose of the 1031 Tax Exchange.
- Potential changes to the 1031 Tax Exchange in the near future.
- Rent v. Sell Calculator and how it can help you make an informed decision on real estate investing options
It is common for real estate investors to sell their rental property and purchase a different property, or upgrade their current rental property. If you’ve been thinking about upgrading from a duplex to a multifamily property, a condo to a single family, a single family to a duplex, or any other type of property exchange, there are important proposed tax updates that you should be aware of.
The process of selling a piece of real estate and then using the profits from that sale (tax free) to purchase another piece of real estate involves what is commonly referred to as a “1031 Tax exchange”. However, this long standing and commonly used accounting rule may be changing - and not in the favor of real estate owners.
In 1921, under President Woodrow Wilson, the 1031 Tax Exchange option came into effect. Real estate owners who owned property that was increasing in value were hesitant to sell their property due to the taxes they would incur on the profit of their property sale. This resulted in a low-activity and depressed real estate market. To encourage the buying and selling of rental real estate, the federal government established the 1031 Tax Exchange, which allowed real estate owners to avoid capital gains tax as long as they were reinvesting the full amount of their profit upon selling into another property.
Though there are many rules regarding how to take advantage of this benefit, the 1031 Tax Exchange has continued to promote real estate transactions. (For questions in regards to this process, please reach out - Grace Property Management would be happy to provide guidance in regards to the 1031 Tax Exchange.)
There are two potential proposed changes coming from the Biden administration which would change the rules of the 1031 Tax Exchange:
Profit capped at $500,000: The Biden administration is considering capping the profit upon which you can avoid capital gains tax. If signed into law, any profit over $500,000 would be subject to capital gain tax.
Abolishment of the 1031 Tax Exchange: Some within the Biden administration believe the 1031 Tax Exchange should be done away with all-together. Grace Property Management believes this would cause great damage to the rental real estate world by discouraging real estate transactions.
With these potential changes in the near future, it may be beneficial to consider upgrading your property now in order to take advantage of the current 1031 Tax Exchange rules. In considering making this move, Grace Property Management offers a Rent vs. Sell Calculator to help you make a more informed decision. Our Rent vs. Sell Calculator is a quick and easy way to view a financial analysis and see your future net worth if you sell your property vs turning it into a rental property. Simply fill in the information for your property and see your financial future!
If you are a Colorado property investor or have rental properties in the Denver area and have questions about what the changes with the 1031 Tax Exchange could mean for you, give us a call. The expert team at Grace Property Management is here to help investors with all of their property management needs. 303-255-1990 or visit www.RentGrace.com
