An Alternative to the 1031 Exchange Strategy

We have found a growing number of taxpayers who are part of the baby boom generation are looking for ways to exit real estate. They do not wish to reinvest via a 1031 Exchange, but are looking for real estate exit strategies where they can get competely out of real estate and still defer the payment of their capital gain taxes.

While the 1031 exchange is still generally the best tax planning strategy for real estate because you can continue to 1031 exchange throughout your lifetime and then leave the investment property to your heirs at a stepped-up cost basis, we do realize that some taxpayers just want to get out, or perhaps are selling an assets, such as a business that is not well suited for a 1031 exchange.

Taxpayers who fall into this category may want to consider a Deferred Sales Trust as a real estate exit strategy that allows them to sell their asset and still defer the payment of thier capital gain taxes over a period of time to be defined by them. The Deferred Sales Trust is structured pursuant to Section 453 of the Internal Revenue Code, and the IRS has issued a Private Letter Ruling regarding the Deferred Sales Trust strategy.

It is essentially an alternative for taxpayers to consider when the 1031 exchange strategy is not a suitable approach for them to take. Careful analysis is required to ensure that either is a suitable tax planing strategy, so always consult with your tax advisor before proceeding.

Comments

[PLR]

A potential alternative to the traditional 1031 exchange is the guaranteed lifetime income trust; technically, a charitable remainder trust. The CRT strategy includes several benefits that often outweigh those of the 1031. This strategy also provides substantial income and estate tax benefits and the potential to receive an increased income compared to selling property, paying taxes and reinvesting proceeds.

[Wealth Legacy Series]

Hi PLR,

I would have to disagree on this one. Charitable Remainder Trusts are very powerful tools as is the 1031 Exchange. However, they work very different from each other and depend on the goals and objectives of the taxpayer. The blanket statement that one outweighs the other is misleading.