2011 Real Estate 1031 Exchanges, Tax-Free Exclusion For Estate and Gift Taxes, Plus The Stepped-Up Basis For Inherited Property
The amended version of H.R. 4853 that passed has a definite positive effect on 1031 exchanges. The capital gains tax rates have remained as they were. For real estate this means they remain at 15% maximum.
The tax-free exclusion amount for estate and gift taxes, and the stepped-up basis for inherited property means the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important aspect of the estate tax agreement for taxpayers is that a property is inherited at the stepped-up basis. This means that while the decedent may have had a low tax basis as a result of purchases made years ago and/or exchanging, the property will be inherited at a stepped-up basis at the market value at the date of death. Thus, an exchanger can continue over the years to defer capital gains, including depreciation recapture, by doing an exchange, and then leave the property to heirs without any income tax on the deferred capital gain. Their exchanges over the years are, in fact, income tax free. The heirs will not have to pay any income tax on the previous gain as they will receive the property with a tax basis at its current market value. If they sell immediately, they probably will not have any capital gain. If they hold the property, then only the capital gain and depreciation taken while they owned the property would be taxed, unless they also do a 1031 exchange. These provisions will be in effect until the end of 2012.
Receiving 1031 Escrow Funds in The Year Following Exchange
The IRS 1031 regulation provides that if an exchanger receives cash from the qualified intermediary at the end of the exchange, or if the exchanger had a bona fide intent to do an exchange but does not complete the exchange by receiving a replacement property, then the gain on cash received will be reported for the tax year in which the exchanger actually receives the cash from the qualified intermediary.