The term “1031 exchange” refers to a real estate investing allowance in Section 1031 of the Internal Revenue Code. That section allows capital gain tax deferral on real estate gains when those gains are reinvested into another like-kind property. While often used for growing a real estate portfolio, a 1031 exchange can also play an important role in your estate planning strategy in Connecticut.
A 1031 exchange allows you to postpone paying capital gains taxes when you sell an investment property, if you reinvest the entire sale proceeds into another property of similar value and type. This strategy can be repeated, allowing you to continue deferring taxes while expanding your real estate holdings over time.
The step-up in basis benefit
One key advantage of incorporating a 1031 exchange into your estate plan is the “step-up” in basis. When you pass away, your heirs inherit your property with a new basis set at the current fair market value. This step-up in basis can substantially reduce or even eliminate the capital gains taxes your heirs would face if they choose to sell the property.
In essence, this provision allows your family to benefit from tax savings, which can significantly boost the value of the assets you leave behind. This is a compounding benefit as if you used the 1031 exchange in life, you likely avoiding paying capital gains in life as well.
Deferring taxes while growing your investments
The ability to defer capital gains taxes through a 1031 exchange offers ongoing benefits. By reinvesting the full proceeds from each sale into new properties, you are not only growing your investment, but also avoiding immediate tax obligations. This deferral can be a game-changer for maximizing the potential of your real estate assets and ensuring that your portfolio can continue to grow over time.
Incorporating a 1031 exchange into your Connecticut estate plan can offer substantial tax benefits and a smoother wealth transfer to your heirs. By deferring taxes and taking advantage of the step-up in basis, you can help secure a financially stable future for your family while optimizing your real estate investments.