1031 Exchange Planning for 2011

The law (the amended version of H.R. 4853) that passed after agreements were reached between the President and Congress has a definite positive effect on 1031 exchanges. The major areas of concern were the capital gains tax rates, the tax-free exclusion amount for estate and gift taxes, and the stepped-up basis for inherited property.

First, the capital gain tax rates have remained as they were. For real estate this means they remain at 15% maximum. For estate and gift taxes, the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important aspect of the estate tax agreement for taxpayers is that a property is inherited at the stepped-up basis. This means that while the decedent may have had a low tax basis as a result of purchases made years ago and/or exchanging, the property will be inherited at a stepped-up basis at the market value at the date of death. Thus, an exchanger can continue over the years to defer capital gains, including depreciation recapture, by doing an exchange, and then leave the property to heirs without any income tax on the deferred capital gain. Their exchanges over the years are, in fact, income tax free. The heirs will not have to pay any income tax on the previous gain as they will receive the property with a tax basis at its current market value. If they sell immediately, they probably will not have any capital gain. If they hold the property, then only the capital gain and depreciation taken while they owned the property would be taxed, unless they also do a 1031 exchange. Importantly, the bill gives some certainty to the exchange tax provisions that will be in effect until the end of 2012.

This is an interesting discussion by attorney Bob Klueger of some important recently enacted changes in the estate tax laws; including the use of A/B trusts.

Bob Klueger talks about the new estate tax law just enacted by congress. December 20, 2010


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