Greetings from downtown Manzanita. Kay and I hope all is well. Most of us think of taxes as a necessary evil and all bad news. However, when it comes to real estate, the Internal Revenue Service has some shockingly good news for us. Although the following is somewhat technical, we’re talking about potentially huge savings in taxes so please bear with us.

Section 121: Exclusion of Gain from Sale or Exchange of a Principal Residence.

Under section 121, a taxpayer may exclude up to $250,000.00 ($500,000.00 for joint returns) of gain realized on the sale or exchange of the taxpayer’s principal residence if the taxpayer owned and used the property as their principal residence for at least two years during the five-year period ending on the date of the sale or exchange.

Remember, we’re talking about $250,000.00 ($500,000.00 if filing jointly) of gain. Also, this is not a one-time exclusion. Unlike a previous once-in-a-lifetime exclusion for senior citizens, the new exclusion may be claimed repeatedly, but usually only once every two years.

Example 1. Unmarried taxpayers A and B own a house as joint owners, each owning a 50 percent interest in the house. They sell the house after owning and using it as their principal residence for 2 full years. The gain realized from the sale is $256,000.00. A and B are each eligible to exclude $128,000.00 of gain ($256,000.00 -- 2) because the amount of realized gain allocable to each of them from the sale does not exceed each taxpayer’s available limitation amount of $250,000.00.

Example 2. The facts are the same as in Example 1, except that A and B are married taxpayers who file a joint return for the taxable year of the sale. A and B are eligible to exclude the entire amount of realized gain ($256,000.00) from gross income because the gain realized from the sale does not exceed the limitation amount of $500,000.00 available to A and B as taxpayers filing a joint return.

Section 1031: Tax-Deferred Exchanges

1031 exchanges are a wonderful way to preserve capital when selling one property and acquiring another. It is one of the most powerful investment tools for real estate owners. The advantage of a 1031 exchange is the ability of a taxpayer to sell income, investment or business property and replace it with like-kind property without having to pay federal income taxes on the transaction. The replacement property must be like-kind. For real estate exchanges, like-kind replacement property means any improved or unimproved real estate held for income, investment or business use. Improved real estate can be replaced with unimproved real estate. Unimproved real estate can be replaced with improved real estate. One property can be exchanged for two or more properties, two or more properties can be exchanged for one. However, a taxpayer’s personal residence cannot be exchanged for income property and income or investment property cannot be exchanged for a personal residence in which the taxpayer will reside. The most common type of exchange is called a delayed exchange.

Example: You wish to sell a lot you own in Manzanita (value $250,000.00) and exchange it for an income-producing duplex in Portland (value $425,000.00). You have 45 days from the close of your property in Manzanita to identify the duplex you want to purchase and 180 days to make the exchange. This kind of transaction involves an exchange company or accommodator -- a business that assists real estate owners with their exchange.

If you would like more information about 1031 exchanges, please let us know.

We are in the business of helping people to buy and to sell homes and vacant land. Our office is open and staffed seven days a week to serve your real estate needs. With seven full-time agents, we have the knowledge, experience, training and expertise to make real estate sales happen. We look forward to doing business with you.

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