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January 8th, 2017 by FGG

SWAP UNTIL YOU DROP

If you decide to defer your tax liability via a 1031 Exchange and keep your money in your pocket instead of giving it to the government, you’re able to use that money to leverage into bigger and better investments with bigger and better overall returns. Remember, a third or more of your money could go to pay taxes.

The ability to forego paying taxes and instead reinvest proceeds into another growing income property is one of the most powerful wealth creators available in the US. Money that is lost to paying taxes is lost forever. When your proceeds are reinvested, you will gain additional monthly income, buy larger and hopefully more profitable properties, and realize greater gains when those properties are eventually resold.

And if those benefits are not sufficiently compelling, there is another huge benefit to those investors who plan to pass assets along to their heirs. The phrase “swap until you drop” means that your heirs can inherit your appreciated real assets pay little to NO TAXES whatsoever at the time they take title. When you pass away, the basis in the property steps up to fair market value for your heirs. For example, let’s presume that you currently own an apartment building valued at $5 million which you originally purchased for $2 million 15 years ago. If you sold the property before you passed, you would have a significant capital gains and depreciation recapture liability that would reduce the net gains to your estate (unless you choose to do another 1031 Exchange). However, if the property remains unsold in your estate at the time you pass, the property’s tax basis steps up to fair market value, which is $5 million. Your heirs now own your former property with a new tax basis of $5 million and, if they choose to immediately sell before it appreciates further, they will have $0 tax liability.

Getting a step up in basis for your heirs is a fantastic way to eliminate tax liabilities that you’ve been deferring over a lifetime of investing, including any depreciation recapture benefits that you may have used to shield your past income from taxes. In fact, most of our clients will plan on using this strategy. It’s so common in our industry that I call it the three Ds of investing. You’re going to defer, defer, and then die. Then of course your kids or your heirs are going to benefit from that step up in basis.

“Swap until you drop” strategies are widely used as one of the most potent estate planning tools available to help preserve appreciated assets for the full benefit of one’s heirs. If you are unfamiliar with this technique, please take the time to talk to your tax advisor or estate planner to better understand how this may apply to your situation – especially if you plan to leave assets to family and other heirs when you pass. “Swap until you drop” is a major exception to the adage that there is nothing as certain as death and taxes – since this strategy will at least help you avoid one of those certainties.

FGG Admin

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