Let’s say you’ve been a business owner and are now selling the building your business occupies, or you’ve been an owner and landlord of an apartment building for the last 20+ years. You are looking to retire and enjoy the fruits of your labor, and you don’t want the day-to-day business or landlord responsibilities. You’ve earned enough to retire and don’t need the proceeds from your property to live off of. You are thinking about your kids, grandchildren, and/or causes you care about and how you can make an impact.
If you were to sell your building, now valued at $3,000,000, you would pay approximately $650,000 in taxes between depreciation recapture and state and federal capital gains, netting you approximately $2,200,000 after taxes and transaction costs.
Now, instead, because you are thinking long-term about passing on generational wealth, you look to secure a parcel of land in the path of development growth. You do a 1031 exchange, so you postpone paying any taxes and purchase 80 acres of land for $3,000,000. The city has this land guided for future industrial and medium-density housing. Now, the future use may take up to around 15 years, but that’s okay because there is nothing you need to do other than wait. There is farmland that is leased and a single-family home that is rented out, so it covers the taxes, insurance, and overhead of the property.
At a certain point, you pass away and leave your estate to your beneficiaries. Not only do your beneficiaries receive a stepped-up basis, which wipes the previous tax obligation from your last property, but it also sets the new basis as the value at the time of your passing. With the property now being eligible for rezoning, the land can be sold to a developer for industrial and medium-density housing, which should be valued at approximately $100,000 to $200,000 per acre. At $150,000 x 80 Acres, this would equal a future value of $12,000,000. What an amazing generational impact could be made in 10-20 years.
