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

How to Use 1031 Exchanges to Set Yourself up for Retirement

How can a 1031 exchange help you turn your investment property into your dream retirement home?

Let's say that you sell an industrial property in New Jersey for $4 million and you take your gains (your equity) from that sale and reinvest it into a condo in Palm Springs. That condo in Palm Springs will need to be held for investment or business purposes for a substantial period of time after conducting the exchange. But once you’ve satisfied the holding requirement you may have a long-term indeterminate intention as to what you're going to do with the property. Perhaps you'll retire to Palm Springs, kick the tenants out of the property, and eventually convert the property to your principal residence.

Intentions Are Important

The key here is that you want to be able to substantiate that your exchange was valid and that your initial intention when you acquired the property qualified for 1031 - that you intended to hold it for investment or business purposes.

Eventually, down the line your intentions may change and you may convert that property to your personal use. Once you've satisfied the section 121 principal residence exclusion requirements you may be able to eventually sell that replacement property as your principal residence and exclude a portion of the $500,000 exclusion for married couples or $250,000 for individuals on the sale of your now principal residence. This requires a great degree of coordination with your accountant and your qualified intermediary so have the conversation with your professional advisers first and lay the groundwork for eventually having a dream home.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved