From 24/7 Wall St. · Vilma Rios · · 1m 30s
Section 1031 Tax Rule Lets Landlords Swap Buildings Forever
Landlords defer capital gains tax by swapping properties indefinitely under a 1921 rule, with the bill vanishing at death.
In brief
Landlords defer capital gains tax by swapping properties indefinitely under a 1921 rule, with the bill vanishing at death. Landlords can swap rental properties forever without capital gains tax, but the tax bill disappears for heirs at death. Originally reported by 24/7 Wall St..
Section 1031 Rule
A 1921 tax rule lets landlords swap one rental property for another indefinitely without triggering capital gains tax.
Deferred Tax Calculation
A landlord paid $400,000, deducted $250,000 in depreciation, and trades for $1.4 million, creating a $1.25 million taxable gain.
Federal Tax Bill
The federal tax on $1.25 million gain is $310,000, with $62,500 on depreciation and $200,000 on long-term gain.
Section 1014 Rule
Section 1014 resets the cost basis of inherited property to its market value at death, wiping out deferred gains for heirs.
Swap Mechanics
Landlords must use a qualified intermediary, identify replacement property within 45 days, and close within 180 days to defer tax.
State Variations
California requires owners swapping California property for out-of-state property to file Form FTB 3840 annually for tax collection.
Tax Implications at Death
If a landlord trades into a $1.4 million building worth $2 million at death, heirs inherit it with a $2 million basis and owe no federal capital gains tax.
Key Steps for Landlords
Landlords over 60 should run both numbers, consider Delaware statutory trusts, and keep detailed records to avoid missed deadlines.
The short version
Landlords can swap rental properties forever without capital gains tax, but the tax bill disappears for heirs at death.
