If you’ve been holding on to a piece of Whidbey Island real estate and the capital gains tax has you afraid to sell, you’ve come to the right place. There’s a tax loophole in Washington that you can take advantage of — the 1031 exchange.
The 1031 exchange allows you to sell your investment property without paying Washington State’s 28.8% capital gains tax, as long as you purchase a property of the same or greater value.
There are plenty of fiscally-responsible benefits to taking advantage of the 1031 exchange, all of which can help you realize your goals of owning Whidbey Island real estate.
Capital gains tax can be invested
Using the 1031 exchange, you can defer 100% of your capital gains tax and invest that money in your new property, making it easier to upgrade—which is an excellent way to continue to make money on your investment property.
However, when using the 1031 exchange, you have a 45-day time limit to identify your next property, which means you need to do your research well before you put your existing property on the market. You then have 180 days to finalize the sale.
It’s an excellent way to build wealth in Washington
If you’re selling a Whidbey Island investment property worth $1 million, you’ll have an increased cash flow to make a significant purchase. Under the rules of the 1031 exchange, you can purchase a new property worth as much as $2 million, making the most of your tax break and adding substantial value to your property holdings.
You can also use your capital gains tax break to purchase several properties—the limit is three—extensively expanding your portfolio and, over time, building much more wealth than if you held on to that initial property.
You can prevent problems with long-term property
If you have a rental property with a steady rental income, you may be reluctant to sell. But property values may depreciate, causing you to lose money in a sale—or you may look at expensive maintenance projects down the line.
If you’re nervous about selling, the 1031 exchange could be a smart way to divest yourself of a property that no longer suits your needs—purchasing commercial real estate or another Whidbey Island investment property that requires lower maintenance costs.
It's not rare for investors to keep the property long after they should have sold it because the idea of selling is daunting. If you do your homework, however, you can likely find Whidbey Island property for sale that is far better than your current holdings, and by using the 1031 exchange, the biggest worry about selling is erased.
You can use the 1031 exchange again
It may seem too good to be true, but the 1031 exchange is not a one-time tax break. If you sell a property that you purchased using the 1031 exchange, you’re now responsible for the capital gains taxes you avoided when you sold your previous property. But the good news is, you can use the 1031 exchange again.
In fact, this particular tax loophole can allow you to build a sizable nest egg purchasing Whidbey Island real estate over the years—allowing you to retire in luxury, leave your heirs a large inheritance, or both.
Heirs can benefit
If a property owner dies and the property purchased using the 1031 exchange has appreciated, an heir can sell the property immediately and pay no capital gains tax. However, if they wait too long, capital gains tax will again be on the table, and the heir will have to pay capital gains tax on the increase in the property’s value. For example, a $700,000 property now being $1,000,000 means that $300,000 would be taxable unless the heir sold using a 1031 exchange.
Your investment can become your home
If you find your dream home among Whidbey Island houses for sale, you may be able to turn that gem into your primary residence. However, the rules for the 1031 exchange are pretty strict — you need to use the residence as an investment property for five years before the home can be converted into your primary residence. Additionally, properties that you fix up and flip are not eligible for the benefit—unless you hold the property and use it as a rental investment. Depending on what you intended for the property when you purchased it, you might not qualify for the 1031 exchange.
Depending on the property you own, finding renters shouldn’t be difficult. Waterfront homes are straightforward to rent, and many are located on Whidbey Island. The island’s many year-round activities will also ensure full-time and vacation renters. Your long-term renters must understand your plans, so there’s no trouble when it comes time for you to move in or sell.
Are you looking for Whidbey Island real estate?
If you’re looking for someone to help you better understand the tax breaks of a 1031 exchange, lifelong Whidbey Island resident Tim C. Miller has the experience you need to make a smart, fiscally-rewarding transaction. Contact Tim today to get started on your next real estate journey!