1031 Exchanges, Investments and Capital Gains

With an increase in estate tax exemption currently up to $8.6 million for a couple's combined exemptions, this is liked to a shift in focus towards preventing capital gains impact. One of the easiest ways for you to minimize the impacts of capital gains in real estate transactions is to use a 1031 exchange. In order to work with a 1031 exchange you need to identify a qualified intermediary and be prepared to move forward with the sale of one property and the purchase of one or more replacement properties that qualifies under the like kind exchange rules set forth by the IRS. A qualified intermediary can counsel you about performing a 1031 exchange on real estate investment as well as artwork, allowing you to roll forward any capital gains absorbed during this time to the future.

A qualified intermediary, though, can also guide you in additional areas of choice. When your assets sell, the original purchase price of those assets is known as the cost basis. Taxes are charged on the difference between that and the appreciated value. Long term capital gains rates are now 25% to 33% of that gain in value. If a person holds the asset rather than gifting it upon death, the cost basis instead shifts to the current fair market value reducing the amount taxed in total. Therefore a person can upstream the asset to a parent then have it come back to the child upon the parent's death. In order to succeed with a 1031 exchange, it is important to identify the right person as your qualified intermediary.

Your qualified intermediary can also counsel you about formation of a joint exempt step up trust where a surviving spouse gets to sell an appreciated asset without being hit by capital gains tax. When you use a real estate transaction as a 1031 exchange you'll need to identify replacement property as soon as possible and be able to close on that property or properties within 180 days from the sale of the first property. Having a qualified intermediary go through the rules of such an exchange can be beneficial so that you do not get hit with capital gains taxes as a result of not following IRS regulations.