Helping Families Plan is the Best Part of my Business

I take great pride in working with families and helping with their futures. When I got in this business I had no idea that helping families plan would be my favorite part. My friend Ron Ricard, a real estate 1031 Exchange Specialist is part of my team and I want to share his insight into this. Ron if you would please.

1031 EXCHANGES AS AN ESTATE PLANNING TOOL

What do three children do when they inherit one property? If you answered “Fight!” you would probably be correct. Frequently, people think 1031 exchanges are only useful to defer taxes when an investor wants to“reposition” assets. However, when a taxpayer dies, their estate receives a stepped up basis in the inherited property. As a result, all of the built in gain disappears upon the taxpayer’s death. For this reason, for estates not subject to the Federal estate tax (below the exemption level), a 1031 exchange is an ideal estate planning tool.

For example, let’s assume that Ted Taxpayer, a retiring baby boomer, owns a farm which is worth $900,000 and that has been fully depreciated. He has three children who live in different parts of the country and none of them are interested in continuing the family farm. If Ted sells the farm, he will pay taxes on $900,000; assuming a combined state and federal tax rate of 20%, he will pay $180,000 in taxes. This will significantly reduce the value of his estate and the only income that he will have is Social Security without reducing it further. For these reasons, a 1031 exchange provides an excellent opportunity.

Ted can sell the farm for $900,000 in a 1031 exchange and acquire three replacement properties, each worth $300,000. Presumably he would consult with each of his children in the selection of the respective properties and hire that child to manage a property creating an income stream for his retirement years. Each property could be placed into its own revocable living trust with one of the children being named as the beneficiary of the trust.

When Ted passes away, the properties will automatically transfer to the child who has been managing it, free of taxes and have a stepped up basis equal to the value of the property at the time of Ted’s death. If Ted were to die during the 1031 exchange, his heirs can complete the exchange and still receive a stepped up basis in the replacement properties.

Be certain to consult with your tax and legal advisors before entering into any plan relating to taxes and estate planning. For more information about 1031 exchanges, please contact me.

At Wright Realty and Investments we do things “The Wright Way.” We provide more options than traditional real estate offices. Knowledge is power and experience provides comfort. 

Contact my associate Ron Ricard Here