Estate Planning & Real Estate: What is a Stepped-Up Basis at Death?

Under the current estate tax laws, when an individual dies all of his or her assets are revalued to their fair market value - the value that the estate tax is imposed upon. The trade-off that the current tax regime contemplates is that, except for a few categories of assets like your retirement funds or other installment sales, all of your assets are given a new basis which is the value that is used to determine the gain that you incur when a sale takes place.

So if you owned an apartment building for a long period of time and depreciated that down to a very low value, but then owned that property at death, the value of that asset would be stepped up.

Consider Your Tax Situation

If you turned around the day after death and sold that property, your capital gains and other gains on that transaction would be zero if you sold it for that new stepped up basis. The other advantage of the stepped-up basis is that with real estate under certain circumstances you will be able to re-appreciate that asset again after the step up. In other words, you'll be able to take a depreciation deduction a second time. Those are some very significant advantages to utilizing the 1031 exchange in an estate planning scenario.

Contact a Qualified Intermediary

If you’re thinking about availing yourself of the tax-saving benefits of a 1031 exchange, contact a qualified intermediary to work through the details of your transaction. Contact our qualified intermediaries today at our office in Minneapolis to get your 1031 exchange off the ground!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Estate Planning Considerations with Community Property States

In the realm of estate planning, many taxpayers don't really have their estate plan in place before they've sold their relinquished property. In the course of doing the organizational work, they may ask “can John Doe sell his relinquished property and have John Doe as Trustee of his own grantor revocable trust receive the replacement property?”

Generally, a revocable grantor trust is going to be running under the same social security number as John Doe in this hypothetical and it's going to be considered a continuation of investment by John Doe.

The same goes for a single-member disregarded entity such as a pass-through LLC that is wholly owned by John Doe. That would be another suitable way to acquire the replacement property.

Community Property States

Many of our clients have amassed wealth in real estate over a long period of time and now they're in their golden years and they may have moved to a community property state such as California, Texas, or Wisconsin. Does a taxpayer’s step-up in basis change if they’ve relocated to a community property state?

The short answer is yes. How assets transfer in terms of your estate plan are impacted by the local law and also by the federal and state taxation scheme.

So stepped-up basis is something that is a local concern as well as a federal concern. If you change your residence you need to make sure that you consult with local council to confirm that your current estate plan is valid.

Minnesota Property Considerations

In some states (like Minnesota) a lot of residents attempt to modify their residence for purposes of taxes by becoming snowbirds and permanently residing in Florida (for example) but continuing to own Minnesota real estate in pass-through entities. The current Minnesota estate tax treats any real estate owned that is located in Minnesota as a Minnesota taxable asset. So even though you are a Florida resident, if you own an apartment building or other type of real estate in Minnesota either in your individual name or in a pass-through entity, you will potentially be subject to a Minnesota estate tax.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Why to Consider 1031 Exchanges in Your Estate Planning

When you inherit a piece of property upon the death of a grantor, you receive that property with a step-up in basis. You can receive that inherited property and instead of having the decedent's low basis during their lifetime the basis gets stepped-up to the fair market value at the time of their death, generally speaking.

So rather than sell the property and unnecessarily trigger the recognition of gains in your latter years, many taxpayers who own property instead consider taking their gains with them to the grave. You have to stop breathing for this plan to work, but when you do, then your kids can inherit the real estate with the stepped-up basis.

When Descendants Don’t Want to Inherit Property

One thing I've noticed in my many years helping taxpayers with 1031 exchanges is that for a lot of people who have made money in real estate, their children don’t necessarily wish to inherit and deal with their property. These descendants are often in high-performing professions such as doctors, or lawyers, and they're busy with their careers and have no interest in their parent’s real estate holdings.

Consider a 1031 Exchange

In some cases they just don't have any interest in real estate because they watched their parents toil and labor and suffer with the demands of owning a piece of real estate and they don’t have any interest in repeating that story themselves. These are just some of the challenges with estate planning and thinking about the next generation because the kids may not have the aptitude or the desire to take on that responsibility of the inherited property. If this is the case, a good alternative option would be to 1031 exchange out of the management intensive property and into something less management intensive.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Consider 1031 Exchanges in Your Estate Planning

Many people that are getting up there in years are concerned about their estate planning as part of their 1031 exchange. Many people will own their old relinquished property in their own individual names but would prefer to take title to the replacement property as Trustees of their own revocable trust.

Taking Title to the Replacement Property

From the IRS’s perspective, when you take title to the replacement property as Trustee of your own revocable trust the IRS really doesn't make any distinction between John Doe individually and John Doe as Trustee of his own trust.

However, irrevocable trusts are a different and distinct animal and will not be viewed by the IRS as the same taxpayer, so we need to be very cautious as we do our estate planning as part of the 1031 exchange to make sure that we have the circuit completed. That the owner of the relinquished property either individually or as Trustee of the revocable trust receives title to the replacement property.

Continue to Hold the Property for Investment Purposes

Thereafter, the taxpayer that completes the exchange needs to continue to hold their replacement property for investment or business purposes for a long and substantial period of time, which means that as soon as you complete the exchange it would not be prudent to start giving away interest in the replacement property because giving away the property would be antithetical or opposite of holding the property for the qualified purpose of investment or business purposes.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Estate Planning Tips Video

In this 1031 FAQ video, Jeff Peterson offers a few 1031 exchange estate planning tips. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about 1031 estate planning, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved