People often buy a home as an investment. However, tax reform could make that investment more of a challenge…but there are ways of meeting that challenge.
With Congress talking about tax reform and how to pay for it, one thing being considered is to eliminate the 1031 exchanges, according to the Financial Advisor in “What To Do If Congress Eliminates 1031 Exchanges.”
One of the reasons people purchase homes is that the price of real estate almost always goes up. The home is an investment.
When someone buys a house and it is sold years later, it is generally worth more than the original purchase price. The seller can use the gain to purchase a better home.
However, there is a potential roadblock in the way.
The difference between the original purchase price and the selling price is a capital gain. It can be taxed, which would make people less willing to sell their homes.
The seller can use Section 1031 of the tax code, which eliminates any capital gains tax, if the income is used to purchase something similar, such as another home.
The same logic and rule holds true for other types of investments, including stocks and bonds.
While it is probably unlikely that the popular and useful Section 1031 will be eliminated, there is no reason to panic, if it happens.
There are other methods that can be used to reduce or eliminate capital gains taxes that an estate planning attorney can explain.
These methods include things such as grantor retained annuity trusts, charitable remainder trusts and family limited partnerships.
An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.