Estate planning with 1031 exchanges
May 30, 2013 - Front Section
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 his income. 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, 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 designated child free of taxes and have a stepped up basis equal to the value of the property at the time of Ted's death.
Consult your tax & legal advisors as well as an Intermediary current on tax issues before entering into any plan relating to taxes and your estate.
Patricia Flowers is vice president CESÂ®, Investment Property Exchange (IPX1031Â®), Boston.