TURNING A TAX DEFERRAL INTO A TOTAL TAX AVOIDANCE
Section 1031 Exchanges: Swap Till You Drop
Previously we looked at the requirements and mechanics of a Section 1031 Exchange. For a better understanding of the basic operation of 1031 exchanges please check out that article.
Here we look at one aspect of Section 1031 Exchanges that can actually turn the tax deferment into total tax avoidance.
Technically speaking the taxable gain in a 1031 is merely deferred and not avoided completely. That’s because your basis in the replacement property is the same as in the relinquished property. Therefore when you go to sell the replacement property outside of a 1031 exchange you will end up paying taxes on the gain that you originally avoided. However, the deferred taxable gain can become a complete tax avoidance if the replacement property is passed down upon death. In that scenario the heirs would receive the property with a stepped up basis and the original gain would never be taxed. By continually employing 1031 exchanges until death you can turn a tax deferral into a tax avoidance. This strategy has come to be known as “swap till you drop.”