1031 Exchange and gifting strategy

[Bolek Schwab]

My extended family and I own a vacation property structured under an LLC - S Corp, split between two parties and I plan to sell my 1/2 of the property to the other family member, and utilize a 1031 to roll the proceeds into another real estate investment. I had planned to bequeath my 1/2 of the property to my adult son but would like to gift it to him sooner rather than later using the estate tax exemption. At what point in the process can I make the gift / what is the best strategy to expedite the transfer? Can I form a new LLC, make the sale, go thru the 1031 procedure, acquire a rental property and then hire my son to manage it, then gift it to him after a year? Is there a cleaner path to the desired outcome?

[Jerry W.]

@Bolek Schwab, I am going to say stop and get some expert tax advice. The amount you can transfer free from inheritance tax is the same if you gift it now as compared to him getting it at death. The huge problem you are not considering is capital gains tax. Why are you doing a 1031? To avoid capital gains taxes. If you gift the property to your child now then their tax basis is your current tax basis. If they ever sell it they must pay taxes based upon your basis in the property you did the 1031 on. If your son inherits the property upon your death he will get it at full market value and will not have any capital gains except the increase in value after your death. Lets assume your basis for your current one half ownership is $100K and it is now worth $300K. You tax defer into a $300K property that is now worth $600k. Your basis is still only $100K as would your son's basis if you gift it while living. If you or he sells it the $500K is taxed as capital gains, and the rate will vary upon a lot of factors. Lets say the taxes end up being between $55K and $150K. If your son inherits the property upon your death and he sells it for $600k, its value at the time of your death, he pays $o in capital gains taxes. Repeat $ zero in taxes. I would plan more before gifting it now and see an expert on how to transfer it to keep the free stepped up basis you get in estates. Do a transfer on death deed or perhaps an LLC where you own 99% but he owns 1% but on death he gets the rest but can get 90% of the profit from it now. Just some ideas.