Estate Planning & Real Estate: What is a Stepped-Up Basis at Death?

Under the current estate tax laws, when an individual dies all of his or her assets are revalued to their fair market value - the value that the estate tax is imposed upon. The trade-off that the current tax regime contemplates is that, except for a few categories of assets like your retirement funds or other installment sales, all of your assets are given a new basis which is the value that is used to determine the gain that you incur when a sale takes place.

So if you owned an apartment building for a long period of time and depreciated that down to a very low value, but then owned that property at death, the value of that asset would be stepped up.

Consider Your Tax Situation

If you turned around the day after death and sold that property, your capital gains and other gains on that transaction would be zero if you sold it for that new stepped up basis. The other advantage of the stepped-up basis is that with real estate under certain circumstances you will be able to re-appreciate that asset again after the step up. In other words, you'll be able to take a depreciation deduction a second time. Those are some very significant advantages to utilizing the 1031 exchange in an estate planning scenario.

Contact a Qualified Intermediary

If you’re thinking about availing yourself of the tax-saving benefits of a 1031 exchange, contact a qualified intermediary to work through the details of your transaction. Contact our qualified intermediaries today at our office in Minneapolis to get your 1031 exchange off the ground!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Can Partners or LLC Members do Individual 1031 Exchanges?

Owning property in an LLC or an entity that is taxed as a partnership can be problematic when the various partners want to separately do 1031 exchanges. As a result, reconfiguring the ownership well before the sale might be advantageous. The best method of reconfiguration here is the tenancy-in-common model.

In a tenancy-in-common, you take those various individuals out of the partnership and deed them an undivided interest in the underlying real estate and have them hold that interest for some substantial period of time so that they can say they've held the property for investment or business and do a subsequent 1031 exchange on their slice of the relinquished property.

Coordinate with Your Team

That process requires coordination with your accountant, lawyer, financial planner, and the qualified intermediary because even if we break up as tenants-in-common but we still continue to report the asset as a partnership asset we may not have advanced the ball because we continue to conduct ourselves as a joint venture partnership.

Planning ahead is always a good idea and involving your accountant, lawyer, and intermediary early in the process can only benefit you.

Get Your Exchange Off the Ground

Considering the tax-saving benefits of a 1031 exchange? Contact a qualified intermediary today to work through the details of your transaction. Our intermediaries are well-versed in the process and can ensure that you defer 100% of your capital gains taxes – no matter where your sale is taking place. Contact us today at our office in downtown Minneapolis to get your 1031 exchange off the ground!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Is it Possible to Borrow Too Much Money in a 1031 Exchange?

In a 1031 exchange, the taxpayer needs to redeploy (or reinvest) all of their proceeds or exchange funds into the replacement property. However, if they have two large of a mortgage or deed of trust on their replacement property, the net result may be that they are receiving funds back at the replacement property closing. Here are some tips to keep in mind if you find yourself in this situation.

Avoiding Taxable Boot

If the taxpayer receives back money from the closing of the replacement property, these funds may be treated as taxable boot by the IRS. In order to avoid receiving access exchange funds back at the closing it may be necessary to lower the amount of debt being taken out in conjunction with the purchase of the property.

Consult Your CPA

It's always a prudent practice to have your CPA or tax advisor review your settlement or closing statement before completing the purchase of your replacement property to make sure everything is in order and the 1031 exchange goes off without issue.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How Does a Drop-and-Swap 1031 Land Exchange Work?

In a 1031 land exchange the property may be owned by an entity. Within that entity, some of the owners or partners may be inclined to do a 1031 exchange, while other owners or partners are uncertain or they just want to take their cash and run - pay their taxes and be done. What's the best way to proceed in this type of situation?

Reconfiguring Ownership

In these situations, people often think about reconfiguring the ownership of the old relinquished property before their land sells. The idea is if we can keep the old entity comprised now of only the exchange-minded partners or owners and have the entity that owned the property do the exchange, we have a stronger, more defensible exchange.

Tenant-in-Common Interest

The way we can do that is we can redeem or distribute out to the non-exchanging members or partners their tenant in common interest in the underlying land so they become in effect co-sellers who received their portion of the sales proceeds separate and apart from the entity that's going to do the 1031 exchange. There are many variations of the drop-and-swap but this is the one that I like best for limited liability companies and partnerships that own land and want to do 1031 exchanges.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How Do You Determine Property Ownership in a 1031 Exchange?

When you do a 1031 exchange the taxpayer that owns the old relinquished property has to receive the new replacement property. That begs the question: “who owns the relinquished property?”

Who Owns the Relinquished Property?

Often, people aren't sure exactly who the official owner of the relinquished property is. They may have a vague recollection that they bought it when they were not married and then later became married and they're not sure if their new spouse is in title on the property.

Additionally, they may have done some estate planning and created an irrevocable trust and they're not sure if this asset got put into the trust. And they may be in certain corporations or partnership and may or may not have contributed this property officially into the business entity.

Finding the Owner

Step one in a 1031 exchange is to determine who is the taxpayer that's going to do this exchange. That's the taxpayer that has officially owned and held the property for investment or business purposes. There's two ways to investigate this. First we can pull a copy of the last vesting deed for the subject property and see who in the public records is shown as the owner of the property.

Next, we can work with the taxpayer and the accounting firm to look at their previous tax returns to see how this property has been dealt with on their tax returns. For example, Susan and Martha may own the property as tenants-in-common on their public record on their deed, but Susan and Martha may have also filed partnership tax returns showing the asset as being in their business entity in their partnership. So we need to delve into this to determine who is the taxpayer that should do the exchange.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved