I was reading, the other day, some of the provisions of the new tax law and how it will affect the 1031 exchange. By all appearances the law should have a positive effect on exchanges of real estate. The major areas of concern for most people were the rates and treatment of capital gains, the tax free exclusion amount for estate and gift taxes and the stepped up basis for inherited property. The tax rates for capital gain has remained the same for real estate at a 15% maximum. For estate and gift tax there is an exclusion of $5,000,000 per person and for amounts over $5,000,000 there is a tax rate of 35%. One of the most important provisions of this estate tax provision is that real estate is inherited at the stepped up basis at a market value reflective of the time at which the properrty is inherited and not based on the value of the property when it was originally purchased by the decedent. Therefore, an exchanger can continue to defer capital gains by doing an exchange and leave the property to heirs without any income tax on the deferred capital gain. The result is that the heirs will pay no income tax on the previous gain as they will recieve the property with a tax basis at its current market value. If the heir sells the property immediately there will most likely be no capital gain. These provisions will be in effect until the end of 2012.
As always it is prudent to check with a tax professional to determine how the tax law will affect you.