One of the tax Saving Strategies for real-estate
investors is the 1031 exchange, benefits are:
• Tax deferrals, depreciation recapture avoidance (The adjusted cost basis is the original price paid to acquire the asset minus any allowed or allowable depreciation expense incurred.
• Portfolio Diversification into another types of real-estate or consolidate to one type
• Wealth accumulation without paying taxes
• Estate planning
examples: Scenario 1:
I buy a $100k property then fix it up, 10 years later it worth $500k, then I trade it with 4 other properties at $125k each, they go up after another 10 years and each become 500k a piece, then the owner pass away, there’s ZERO TAX because owner stepped-up in basis when they passed away
Scenario 2:
Same example above but owner gifted it before the owner death, let’s suppose owner had 4 kids and gifted one of the four properties to each of the kids, each property worth a $500k (a $2 million estate), now each child will have the same basis which is the owner initial basis $100k for the first property owned (the one property that cost $100k) so each kids basis will be at $25k, plus they will have to recapture all the depreciation taken over the years (calculated by subtracting the adjusted cost basis from the sale price of the asset, The adjusted cost basis is the original price paid to acquire the asset minus any allowed or allowable depreciation expense incurred.). ITS GOING TO BE TAXABLE TO THEM.
Conclusion: Scenario 1 is better (estate planning) to wait till pass away and for the kids to inherit so their tax bill will be ZERO. Owner invested 100k and now over the years it becomes worth $2 million and it’s paying the owner all this time all these rents and a tax free $2 million dollar at the end, if my kids ending up liquidating these properties, they pay NO TAX! That’s an amazing benefit! SO THAT’S THE 1031 EXCHANGE! (NOTE: REVERSE EXCHANGES CAN BE DONE)
