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Financial advisory
Taking Advantage of a
Stepped Up Basis for
Real Estate Heirs
BY CHRISTOPHER MILLER, MBA SPECIALIZED WEALTH MANAGEMENT
As my readers know, I do 1031 Exchanges mostly into partial interest properties. Recently, one of my clients’ DST investments prepared to sell at a great profit and he asked me about doing another 1031 Exchange. My advice surprised him:
“In your case –
let’s NOT do a 1031 Exchange.”
I knew that his wife had passed away earlier this year, so I recognized substantial benefits could be realized by foregoing an exchange and “taking the cash.” A consultation with his CPA confirmed that, in his case, there are great benefits to not exchanging. In fact, his CPA called me a “genius.” (A story that I love repeating.)
THE STEPPED UP BASIS
When someone dies, their property will pass
to their heirs. At that time, their heirs receive a “stepped up basis.” If the deceased had originally purchased real estate, art, stock or any other assets at 10% of their value today – all those “potential” capital gains taxes waiting for him died when he did. For tax purposes, the purchase price for his heirs is the value of his assets when he died. So they could sell his assets the very next day and pay zero capital gains tax.
WORKS FOR DEPRECIATION, TOO
In the case of real estate, the stepped up basis applies to depreciation as well. Investment real estate owners enjoy depreciation deductions every year that they own property. A record of this deduction is kept and called “accumulated depreciation.” If our investor sells his property and does not do a 1031 Exchange, he will need to pay a tax on his total depreciation benefits.
Upon an investor’s death, however, the stepped up basis means that this tax will disappear. More
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Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over four hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998. Call him toll-free at (877) 313 – 1868.
AMM1/6 APARTMENT MANAGEMENT MAGAZINE - AUGUST 2021 67