When does a 1031 exchange make sense?
Posted by Andy Gustafson on Tue, Jun 29, 2010
It depends upon the circumstances. Not all circumstances are alike. In a conversation with a 92 year old who asked whether he should 1031 his commercial properties, I asked why. His response was to avoid the pending increase in federal capital gains tax from 15% to 20% in 2011.
After a couple more questions, his commercial properties have a low basis meaning that they have been held for many years, have a higher appraised value and nearly zero depreciation left. Upon sale, a fairly large capital gains tax will be triggered.
Stepped Up Basis
He is also concerned about the tax implications his sons will face once he passes. We discussed stepped up basis. The term is used to describe when his beneficiaries or sons receive the commercial properties, it will be at the then current value, not at the price he paid. If the sons were to sell the properties soon after his passing, they would not pay a tax. If they waited two years and then sold for example, they would pay a capital gains tax on the increased value from when they received the properties.
He did not have a need for additional cash flow. Given that was the case, there was no need from a 1031 perspective to initiate one. I suggested he talk with his accountant and estate lawyer for estate planning guidance.
Are you considering selling an investment property? To discuss the details and how a 1031 exchange works, call us at 850-496-0090.