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1031 exchange worth it or not

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  • 1031 exchange worth it or not

    my wife's family is going to sell some land that she is a very small part owner and her long term capital gains will amount to about $84,000. due to our income, I estimate capital gains to be the highest bracket of 20%. we dont need the money but I also hate paying taxes that can be avoided/delayed. (20% of $84k is $16,800 in taxes) would it be worth it to do a 1031 exchange even though the amount seems like it might not be worth the effort? on the other hand I'm thinking that $16k is $16k and If I can leverage the entire amount into something worth a lot more over time, maybe it might be worth the some effort. what would you do? invest it (and if so-how?) or pay the taxes and spend it on something like updating the house or a nice car or....?

  • #2
    Well, you will actually pay 23.8% because of the NII and ACA Medicare surcharge, but flip side you will have the fees to set up the exchange (minimal, but maybe a few thousand). More importantly, you have to exchange into something, which will have closing costs. Also, if only your wife is doing a 1031, you will have to separate her transaction from the rest of the family. If you are not already interested in holding more land, or rental property, then my guess is you don’t really want to do the tax deferred exchange. It is a lot of hassle just to defer taxes on ~$20k. (You only avoid them if you defer until death.)

    There are alternatives besides just paying the taxes. Start a donor advised fund and donate the money if you are charitably inclined. Or, invest in an opportunity zone. Or, as you say, pay the tax and do what you want with the money.

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    • #3
      Originally posted by Larry Ragman View Post
      Well, you will actually pay 23.8% because of the NII and ACA Medicare surcharge, but flip side you will have the fees to set up the exchange (minimal, but maybe a few thousand). More importantly, you have to exchange into something, which will have closing costs. Also, if only your wife is doing a 1031, you will have to separate her transaction from the rest of the family. If you are not already interested in holding more land, or rental property, then my guess is you don’t really want to do the tax deferred exchange. It is a lot of hassle just to defer taxes on ~$20k. (You only avoid them if you defer until death.)

      There are alternatives besides just paying the taxes. Start a donor advised fund and donate the money if you are charitably inclined. Or, invest in an opportunity zone. Or, as you say, pay the tax and do what you want with the money.
      That was an excellent response,
      Larry Ragman
      Moderator
      Larry Ragman - far more comprehensive than I would have given! I would add only that, if she is looking at a DAF, it w/b better to donate the interest in the land rather than to donate what is left after taxes if the others owners would agree. At least, wouldn't hurt to consider.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        Have you got the new property picked out? Don't let the tax tail wag the dog. How much time is it going to take and the value of that? Got a sure winner?
        Don't let the tax tail wag the dog.

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