1031 Exchange Lowdown: How to gift lesser capital gains tax to your heirs

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How to gift lesser capital gains tax to your heirs

How you plan to leave your estate often dictates how much finally gets to your heirs. Is it better to inherit real estate than to receive it as a gift before death?

It is always better to inherit real estate than get it as gift from your parents before death. The reason is that when you inherit real estate from a deceased owner, you receive it with a new ''stepped-up basis'' of market value on the date of the decedent's death.

When you receive property as a gift from your parents you actually take over your parents’ much lower basis than the current market value. So when you consequently sell the property you will pay more capital gains tax. This is not so when you inherit the property.

For example – The current value of your parents’ property is $100,000 once gifted you may get it a lower value of $75,000. So when you eventually sell it for $150,000 you will pay capital gains for $75,000 – Much more than if you would have inherited that property.

When you inherit: Let me explain using the same example - When you sell the property inherited from your parents you get the stepped up basis of the market value and you only need to pay capital gains tax on the difference. In other words, if the stepped-up market value of the property is $100,000 and you sell for $150,000 you only pay for capital gains tax for the $50,000 increase in value.

Adding the 1031 exchange point to this scenario leaves you a winner. This is so because you will defer taxes with 1031 exchange transactions and by leaving it in your inheritance - your heirs still manage to get the stepped-up basis on the current market value. They in turn can continue with 1031 exchanges on the same property with the stepped-up market value as investment money!

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July 16, 2006 in Capital gains taxes | Permalink