Step Up Basis With a Sale And Buy-Back Using a 1031 Exchange

When And Where To Use

Apply this method when you have a property that has a low tax basis and where you want to step up the basis for depreciation purposes and at the same time obtain financing to be utilized in any way that you desire but you do not want to pay tax on the sales proceeds. This is a method that can be used when there was a failure to use cost segregation on the various components of the property originally to enhance a depreciation and when the property was acquired several years ago and most of the depreciation has already been taken. This is a property that you desire to keep but at the same time increase depreciation write-off annually while not paying any tax on any money that you receive currently.

Overview

Look for signs of the real estate or businesses having low depreciation write off deduction but large untapped value. Low depreciation deduction — the annual depreciation is lower than the true value of the business would warrant if currently purchased at the market value. The property would have a high underlying real estate or business value — if the business or real estate was sold you would receive a profit and you wish to defer the payment of any tax on the sale of the property — you wish to obtain sales proceeds without paying any tax currently.

Objectives

Looks for real estate or businesses that you’re holding with large underlying value.
Desire to acquire financing or sales proceeds from an existing property.
Desire to pay no tax on any transaction.
Desire to increase deductions/depreciation write-offs in the future.
Want to keep the property but restructure it for your benefit.
Want to increase depreciation through utilizing cost segregation restructuring.

Action Steps

Analyze your various property holdings to determine appropriate property to be sold and repurchased. Then, locate a private party looking for a solid investment that will achieve a higher rate of return than they are currently receiving.

Properly construct the transaction so that it meets the arm’s-length transaction rules laid down by the IRS. Also, the transaction needs to be constructed so that it maximizes depreciation for the reacquired property through the use of component depreciation aspects incorporated into the closing document with an addendum to the offer as well as achieving 1031 tax deferral on the sales proceeds.

It is advisable to seek out an experienced real estate attorney, 1031 title company for handling the transaction, and a tax CPA that is well-versed in cost segregation structuring both for acquisitions at the time of purchase (thus minimizing the cost segregation fee) and for cost segregation when used after an acquisition has been closed.