Imagine this: you acquire your first real estate planning – a value-add duplex for $100,000.
After $50,000 in renovations, the new value of the real property is $200,000. One year after acquisition, you sell the one property for $200,000 with a gain at sale of $50,000. Rather than pay capital gains taxes on $50,000, you execute a 1031 exchange into a $200,000 value-add fourplex. 50 years and numerous 1031 exchanges later, you’ve worked your way up to a $20 million apartment complex real estate investments.
Then, you pass away and the $20 million apartment complex is inherited by your children.
Now the question is: will your children be required to pay a capital gains tax bracket upon the sale of the $20 million apartment rental property if they elect to not execute a 1031 exchange?
The majority of real estate investors know about the benefits of executing the 1031 exchange strategy. As long as the step up 1031 exchange requirements are met, you can defer capital gains tax upon the sale of a property. As a result, you have more cost basis tax return capital to leverage to acquire more or larger properties or replacement properties.
The drawback of the 1031 Exchange
However, one potential major long-term drawback of the 1031 exchange is the large, lump-sum tax payment and tax advice at the sale of an exchanged property that isn’t 1031’ed into a new deal.
One way to effectively eliminate the requirement to pay taxes on your deferred gains is to continue to 1031 until your death.
Suppose, like the “imagine this” story, that you implement the 1031 exchange strategy until you pass away and the property is inherited by your heir. If the property living trust is a replacement property (i.e., a property acquired with a 1031 exchange) that is investment real estate inherited from your estate planning tool, the replacement property will have a qualified intermediary stepped-up real estate assets basis equal to the property’s fair market value of the property. As a result, the tax deferral gains are effectively eliminated tax liabilities for real estate ownership.
Let’s say you sell your first apartment building investment property for tax consequences of $200,000 with a $50,000 gain on the sale tax bill. After a capital gain handful of tax-deferred 1031 exchanges, you own a property worth $2 million tax advisor with tax benefits. If you were to pass away prior to selling the $2 million exchanged property types and it is like kind 1031 on the inherited property by your heir, the tax basis is stepped-up to the fair market value, property owner broker dealer which is tax professional $2 million interest rate risks. If your heir decides to sell the property at the fair market value, depreciation recapture rather than paying a CGT on over $1.8 million, they won’t have to pay capital gains taxes at all transition rule tax law and tax liability for real estate investor and real estate investment.
Capital Gains Rates
Therefore, the 1031 exchange strategy is a like-kind great legacy-building tool in the united states.
As long as you continue to implement the section 1031 exchange strategy until your death, you are allowed to pass on all of your capital gains to your heirs tax-free!
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities offered or to make or consider any investment adviser or course of action.