Today I’m discussing a few topics related to 1031 tax exchanges.
Are 1031 tax-deferred exchanges going away? That’s what we’ve been hearing lately with the new administration. Before the election, Biden was quoted as saying he was looking at rolling back unproductive and unequal tax breaks for real estate investors with income over $400,000. His staff has said they will be looking at so-called like-kind exchanges.
If you’re thinking this is no big deal because you make less than that, keep in mind that with your sale, you could be hitting that tax bracket, and it could affect you. Also, consider this as the beginning of the change; if this matters to you, let your elected officials know how you feel.
If the 1031 exchange changes, it will impact many people.
On the other hand, when reviewing this latest 1031 concern with Julie Bratton of Old Republic Exchange Services, she told me that new administrations routinely put removing the 1031 tax exchange into their plan because they feel it’s a good way to capture lost revenue from taxpayers. However, after doing research, the powers in charge usually change their tune and back off of 1031s. So there are mixed schools of thought about whether this will happen in the coming year. If the 1031 exchange changes, it will impact many people I do business with, as we’re seeing a slew of 1031s happening both inbound and outbound in the Maui real estate market.
Another crucial consideration: A change to the stepped-up basis could also affect the 1031 exchange. Currently, when a person dies, the estate inherits the property at the new valuation. If that’s taken away, it will dramatically affect consumers.
Two common questions I get asked are: Can I use a 1031 exchange as a vacation rental property? and Can I used the house when I buy it? The answer is yes to both questions. There’s a rule called the “Vacation Home Revenue Ruling” which says you can buy any property and use it as a 1031 and a rental as long as you rent it out 14 days minimum to a stranger. Then, you can use it for up to 14 days yourself. Or, you can use the property personally for 10% of the number of days you rent it out per year.
For example, if you rented out the house for 300 days, you’d be able to use it for 30 days. This works very well for a bunch of my clients.
Finally, if you’ve been depreciating any properties in your portfolio and you’re getting close to the end of the depreciation cycle, or you think that change may be coming soon, it may be wise to sell that property and redistribute the money into a new asset. That way, you can restart your depreciation cycle, and if the laws change, your money will be protected longer.
I would love to be your real estate resource on Maui or anywhere in the country, for that matter, by utilizing my excellent network of professional real estate agents. Call or text me if you have any questions about 1031 exchanges or real estate in general. Live your life with aloha, and life will be so much better.