Liquidation After 1031 Exchange
If i did a 1031 exchange today while cap gain rate is 15%, and I liquidate all my RE holdings 20 years from now when cap gain rate is 30%, which rate do I pay? I understand you defer the taxes with the exchange, but not sure if you pay the rate based upon the exchange date or the liquidation date. If the latter, I may nix any 1031 plans to take advantage of the 15% rate now.
With a 1031 exchange you are deferring any gain into the future. You are moving the day you need to recognize the gain and pay the tax into the future.
You pay the tax rate that is in effect when you 'owe' the tax. Hence you would pay taxes based on the future date when you liquidate.
The decision is yours but you are raising a good point re: a lower tax rate now might be worth more then the added compounding if you can defer the taxes.
BTW - That is the key calculation. If you take 15% out now (the tax bill) and then compound your investment for 20 years will you have less or more then if you compounded it for the 20 years and paid a higher tax?
John
[addsig]
Thanks John! Now comes the easy part...the math.
You would use the Federal and State Capital gain tax rate in effect at the time that you actually disposed of the property. You also need to factor in the depreciation recapture issues into the picture. A future value calculation can help you determine if it would be better to sell and recognize the gain now or defer using the 1031 exchange until later. It usually still makes a significant difference in doing a 1031 exchange, especially given a 20 year time horizon.