Defer Capital Gain Taxes Indefinitely
When To Consider A 1031 Exchange
Real estate investors often inquire as to when they should consider using a 1031 exchange. I've always said that the short answer is: always. Always 1031 exchange so that you always defer the payment of your income taxes into the future. It keeps all of the equity working for the real estate investor so they can concentrate on building their net worth.
Keep on Keep'n On
The best way to take advantage of the 1031 exchange strategy is to continuously structure 1031 exchanges. It means that the real estate investor continuously 1031 exchanges throughout his or her lifetime. He or she always defers the payment of their income taxes, which keeps their equity invested and working hard for them. My personal philosophy is to never ever pay depreciation recapture or capital gain taxes on the sale of my investment real property unless I have a very good reason to do so.
Step-up In Cost Basis
The real estate investor's heirs will receive a stepped up cost basis that will be equal to the fair market value of the real property as of the date of the real estate investors death. This means that his or her heirs could sell the real property immediately after his or her death without income tax consequences.
Example
The heir's father purchased investment real estate for $150,000 (cost basis). The investment real property had a fair market value of $650,000 when the father died. His son inherited the investment real property, who will receive a step-up in cost basis equal to the fair market value on the date his father died. The son's cost basis would become $650,000. The $500,000 in capital gain while the real estate was held by the father is not subject to capital gain income taxes. If the son were to immediately sell the real property for $650,000 there would be no capital gain income taxes owed by the son. If the son were to sell the real estate later for $1,000,000 the son would only owe capital gain income taxes on the $350,000 gain. However, the fair market value of the real property is included in the father’s estate and it may be subject to federal, and possibly state, estate (inheritance) taxes. Investors should always consult with an estate planning specialist for assistance in planning for and minimizing his estate taxes.
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