Politics and 1031 Exchanges
Monday March 17, 2008
With national elections coming up, it seems that some real estate investors are opting out of using the popular 1031 Exchange to defer taxes on real estate capital gains. The fear is that a Democratic victory could lead to capital gains tax hikes.
With the current capital gains rate at 15%, some investors are paying their capital gains rather than taking a deferral that they fear could result in a rate of 20% to 25% later. Though there are always exclusions and fine print that complicate the picture, a historical capital gains tax rate table shows rates as high as 39.9%, and long periods of rates at or above 25%. If you're a real estate investor with a transaction coming up, you might want to talk to your accountant.
If you go with that wisdom. Shouldn’t you also sell all your stock that has appreciated and then buy it back after a month.
Why should people treat capital gains off their real estate any different?
I think that you’ve misunderstood one of the most important aspects of a 1031 exchange — you never have to the capital gains tax on the exchanged property. As I explain in my book, 1031 Exchanges Made Simple, “Technically, a Section 1031 exchange is a tax deferral rather than a tax elimination technique. The new replacement property purchased with the proceeds from the sale of old relinquished property has the same tax basis as the old property, and when the new property is later sold, the deferred capital gain, plus any additional
gain realized since the purchase of the new property, is subject to taxation. But since you can continue to exchange the new properties you obtain through
Section 1031 exchanges again and again, you can continue indefinitely to legally
defer taxes. In other words, by taking advantage of the full benefits of the Section 1031 exchange process, you never have to pay taxes on the transfer of real property. Upon death, the basis of property gets “stepped-up” to its fair market value and the accumulated capital gain is never taxed. Even those who inherit the property can sell it at its fair market value at the date of death and not pay tax on that gain. As Section 1031 exchangers like to say, you can “swap ‘till you drop.”
For more information, visit our Website at http://1031NetEx.com.
Michael,
I appreciate your comments. I took the lead from the article at the RealEstateJournal.com. I believe that they were referring to a certain group that had no intention of carrying their exchanges through to their heirs.
Apparently, there are a certain number of investors out there who must have plans to end the cycle in the next few years by selling the asset. This group would be concerned if the timing resulted in a capital gains rate higher than the present, particularly if appreciation in value is stagnant and other returns aren’t acceptable. If I’m still missing something, let me know. I can be a bit obtuse at times.
Again, thanks very much for the comment. Your materials are very thorough and helpful to anyone with investment property plans.