As the federal government continues to print money and run a deficit, forecasts for tax rates are increasing - regardless of the party in power. This idea is causing some real estate investors to pause on their 1031 exchange. Since the tax strategy only defers tax liabilities, they believe paying a lower rate today is better than a higher rate in the future. While we understand the thought process, it helps to explore how the exchange today benefits the estate planning and wealth transfer process.
Investors could be subject to a variety of tax liabilities when selling investment property. These generally include capital gains, depreciation recapture, state capital gain taxes, and a Medicare tax. When combined, these taxes could equate to 30% or more. A successful 1031 exchange can defer all these taxes.
A crucial but often overlooked reason to consider a tax-deferred exchange is to take advantage of a stepped-up basis for heirs upon the property owner's death. Simply put, the heirs receive the property based upon its market value at the time of death; the built-in gain attributable to the taxpayer virtually disappears. An exchangor can continue exchanging properties throughout their lifetime, continuously deferring tax liabilities. With the tax liabilities now erased, the amount transferred to future generations can significantly impact your legacy.
The stepped-up basis impact on 1031 exchanges is huge. It can remove the concern or uncertainty of how high taxes will be in the future. The first step in your exchange is contacting Advantage Wealth Solutions Exchange. Proper strategic planning might mean never needing to worry about what the tax rate is.