The Owner of the 1031 Exchange Passed, Now What?
A 1031 exchange can be a useful estate planning tool for a few different reasons. First, if the property owner dies before selling and therefore paying capital gains taxes on their property, that property will go to the owner’s heirs on a stepped up basis, which means that the built-in capital gains disappear upon the owner’s death and the heirs will not be responsible for that amount.
Second, a 1031 exchange allows the property owner to sell one property in exchange for multiple properties without paying capital gains tax, which makes it easier to divide assets among multiple heirs upon the property owner’s demise.
Example of Using 1031 Exchanges for Estate Planning
Let’s say that Bob owns a fully depreciated farm that’s worth $900,000. He wants to retire, and none of his three children want to take over managing the farm. He also does not want his kids to fight over the proceeds of the one property, nor does he want to sell the farm because he would pay roughly $180,000 in state and federal taxes on the sale which would reduce the value of his estate significantly. It would also leave Bob with no income streams other than social security.
To solve this problem, Bob’s accountant recommends that he use a 1031 exchange to sell his farm and replace it with three properties that are each worth \$300,000. This way he will pay no capital gains taxes, will not reduce the value of his estate, and each of his children can have input on the type and location of the property that will be left to them.
Bob can then hire his children to manage their respective properties, creating an income stream for both his children and Bob himself in his retirement years. He will place each property into its own revocable living trust with each one of his children named as the beneficiary for the appropriate trust.
When Bob dies, the properties will automatically pass to the child named as the beneficiary, with no capital gains taxes due and at a stepped up basis that’s equal to the value of the property at the time that Bob passed away. If Bob should happen to unexpectedly die during the course of the 1031 exchange, his children can complete the exchange as his heirs and still receive the properties as intended.
TFS Properties Can Help
If you are interested in using a 1031 exchange for estate planning purposes, contact us at TFS Properties today! We can help you find a qualified intermediary as well as replacement properties that meet your heirs’ needs.
Our experts can help you find whatever type of properties you want, whether that is a single-family home investment property, a high-rise apartment complex, or a custom portfolio containing multiple property types. Of course, you should always consult your accountant, tax advisor, and legal advisor before making any changes to your real estate investment portfolio for the purpose of estate planning.
The information contained within this article is not intended to be construed as written legal advice. To the extent, you need assistance or guidance on any information contained within this article please consult your tax advisor.