This episode is transcribed from The Accidental Landlord podcast. Visit the link to listen to the full episode.
Peter: All right, welcome to another episode of the Accidental Landlord. Today, we have Megan Destito, who is with Southern California Exchange Services. Megan, welcome to the show.
Megan Destito: Thank you.
Peter: We're happy to have you as well. Please introduce yourself to our listeners and tell them about your role.
Megan Destito: I'm Megan Distito, the owner of Southern California Exchange Services. We specialize in documenting 1031 tax deferred exchanges, ensuring clients have the necessary legal documentation and securely holding their funds from sold investment properties. I've been in the business for about 13 years, starting in 2000, and I restarted my focus in 2019 due to a lack of local competition.
Peter: Got it. You're located in Camarillo, near our area. To begin, could you explain what a 1031 exchange is for our listeners who may not be familiar?
Megan Destito: Certainly. A 1031 exchange stems from the Internal Revenue Code, specifically Section 1031. It allows real estate investors to defer paying capital gains tax when selling investment property, as long as they reinvest those funds into another property of equal or greater value. However, it comes with various requirements and timelines that must be followed to defer the gain.
Peter: Why do we want to defer a gain? Many of our listeners are accidental landlords, not professional investors. Can you explain the benefits and why this is important?
Megan Destito: It all comes down to taxes. Most clients aim to defer paying taxes on the gain from selling their property. This gain is calculated based on their basis, which includes the property's purchase price and any improvements. It gets depreciated over time, and when you sell, you're taxed on the profit from that basis. In California, this can result in nearly 40% in taxes on the profit. A 1031 exchange allows you to defer paying these taxes if you reinvest the proceeds into another investment property of equal or greater value. It's a valuable tax deferral tool.
Peter: To illustrate, let's consider an example where someone purchased their primary residence three years ago for $600,000, and it's now worth a million. They've turned it into a rental property, so they can't claim exemptions for selling it as their primary residence. In this case, they have a $400,000 gain, and a 1031 exchange would allow them to defer paying taxes on that gain.
