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How might a 1031 exchange form a part of your estate plan?

 Real estate has long comprised a large portion of many investor’s estates.  Now, with the passage of the Tax Cuts and Jobs Act of 2018, many investors may wish to consider making real estate a larger part of their portfolio because the Act offers several benefits for tax reduction both during and after your lifetime.  To ensure your real estate holdings are passed with minimal taxation to your loved ones, you will want to make sure your real estate holdings are thoroughly considered and included in your estate plan.

The 1031 Exchange

The 1031 or like kind exchange is a valuable tool for property holders.  Before passage of the 2018 Act, an individual could exchange business property for another of like kind.  In doing so, there would be no tax due on the sale of the property and the adjusted basis in the original property would transfer to the new property. Capital gains taxes would then be avoided.

Now, per the Act, like kind exchanges are only available for real property.  This makes real estate an even more valuable asset when it comes to estate planning.  Your property could forever avoid capital gains if you hold onto it and leave the property to your heirs.  Your heirs will receive a stepped up basis in the property, equivalent to its fair market value on the date of death.   With careful estate planning, use of the 1031 exchange could potentially save you and your heirs significantly in taxes.

Transferring Real Estate Assets

Real estate assets that are transferred as a part of your estate will become part of your gross estate for tax purposes.  Assets that exceed $11.18 million per person will be subject to estate taxation.  There are several options to avoid this result.  One possibility is to gift the appreciating assets during your lifetime, potentially to a grantor trust.  Another option is to sell the real estate assets to the grantor trust, which will not generate income tax.  

Individuals with real estate holdings will want to take steps now to ensure their property is included in their estate plan.  Some advance planning now could greatly reduce the taxes your loved ones pay later on.  Contact an estate planning lawyer for assistance getting started with your estate plan today.