What is a 1031 Exchange? 

A 1031 Exchange is a way to defer capital gains tax when selling an investment property through reinvesting all proceeds into a new investment property.

To learn exactly how a 1031 Exchange work, read part one of the blog here.

How 1031 Exchanges Have Helped Others

Here are some real world examples from Locations' agents. These examples only begin to scratch the surface of possibilities you have with a 1031 Exchange.  Everybody's situation is unique, contact your realtor to explore the possibilities and defer capital gains taxes.  Don't get charged by the government for making a good investment, reinvest that equity and have it benefit you.  

Exchange Inherited Property

Here’s a great story about a client of mine who inherited investment property. Their family bought the property for around $40,000 back in the 1940s, over time it had deteriorated and was in need of some TLC. However, the property was now worth a whopping $1,150,000!

After all the repairs and money that went back into the property, there was a gain of over $1,000,000. Since this was not their principal residence, if they did a traditional sale they’d be left with around $700,000 after capital gains tax to enjoy or invest.

Instead of paying $300,000 to the IRS, they executed a 1031 exchange and rolled that money into a new $1,200,000 investment property, tax deferred.

Kengo Ueno (R) Direct Line: (808) 739-4148  Mobile: (808) 222-4447  E-mail: kengo.ueno@locationshawaii.com

Strengthen your Investment Properties

One of my clients owned 3 properties, a house in Aiea that was their primary residence and two investment condos, one located in Salt Lake and one in Aiea. They weren’t satisfied with their investment properties as they were not appreciating as fast compared to other Locations. Their goal was to sell all 3 properties then use the proceeds to purchase a new primary residence in a better neighborhood and a new commercial property.

Since they had rented out the two investment condos for a long time, they were facing massive capital gains taxes. I convinced them that a 1031 Exchange would accomplish their real estate goals while deferring capital gains tax. I sold their Salt Lake property first and rolled the proceeds into a new single family home in Waialae Iki via 1031 exchange. Later they moved into the house and used it as a primary residence.

Then, I sold their primary residence in Aiea (no 1031 exchange because primary residence).  They held the money until I sold their Aiea condo then rolled the proceeds together with the money they were holding after the sale of their primary residence (1031 Exchange) to purchase a commercial property. 

They avoided paying capital gain tax for both condo sales and now have 2 much better properties they are very satisfied with.

Nicole Choi (R), Partner Direct Line: (808) 732-5004  Mobile: (808) 225-5566  E-mail: nicole.choi@locationshawaii.com   Visit my website

Improve your Rental Potential

I once had a client who had an investment property in Aiea but wanted to buy in a better rental market with more income potential. He decided on Waikiki and I worked with him to find his ideal unit at the Ilikai. He initially wanted to do a reverse exchange, buy the Ilikai unit before selling his existing property, deferring taking title to the new property until he sold his Aiea unit.

Luckily, I was able to find a buyer for his existing property at the same time and did a simultaneous exchange between his new unit at the Ilikai and the relinquished property in Aiea. Instead of making $1,500/month on rent in Aiea, Aqua Hotel is able to fully manage the unit and his average income is above the standard long term rental amounts.

By using a 1031 exchange he deferred his capital gains taxes and bought in a higher quality building with much better rental potential.

Shannon Smith (R), Partner Direct Line: (808) 738-3139  Mobile: (808) 225-3736  E-mail: shannon.smith@locationshawaii.com   Visit my website

Get Creative with your Exchange

I had a retired client that lived in her home for over 41 years and was looking to “Move into new and shiny!” She wanted to move out of Downtown since she was now retired and didn’t want to refurbish the home which needed extensive work. She brought up a 1031 exchange which surprised me as 1031 Exchanges are not available for owner occupants.  This should be the end of the story but here’s where it gets interesting.

As is common in many old neighborhoods, the home was set up as 2 living areas and grandfathered in as "legal non-conforming".  Following her CPA’s advice many years prior, the client had documented rental agreements, filed GET taxes, declared the rental income and paid taxes, and did depreciation on the half of the home she rented out to her son. Meaning, half the value of her home was eligible for a 1031 Exchange! This is a highly uncommon, genius idea! My client and her CPA had planned for this years in advance, and since they documented everything, it was eligible!

When we sold, she was eligible for the single person $250,000 tax exemption selling as an owner occupant on her portion. Had she not had the foresight to do the rental legally, she would have owed a huge tax bill to Uncle Sam.

After completing the 1031 Exchange for half of the value of the home, she rolled into a NEW property to rent to her son and his family and buy her "new and shiny" home.

Jo Frasier (R) Direct Line: (808) 732-5030  Mobile: (808) 255-5335  E-mail: jo.frasier@locationshawaii.com

Increase your Cash Flow 

I once had a client that owned a small one bedroom investment property free and clear (no mortgage) on the west side Oahu but wanted something larger with better rental potential.  We completed a Delayed Exchange on their property, selling their existing one bedroom then finding their ideal replacement property in the form of a 3 bedroom condo in Pearl Ridge.  We were able to take advantage of the historically low interest rates at the time to finance a portion of their new investment property that wasn't covered by the 1031 Exchange proceeds.  

They upgraded their investment, minimized the amount they borrowed, and experienced a substantial increase in cash flow from their new investment property.  

Susan Onishi (R), Partner Mobile: (808) 371-6190   E-mail: susan.onishi@locationshawaii.com   Visit my website

Keith Mann, Staff Writer Office: 808.738.3269  Cell Phone: 703.899.2890 E-mail: keith.mann@locationshawaii.com