Can I pay taxes before selling a property

by Rob Seltzer, CPA, PFS

I did a 1031 exchange eight years ago and have no interest in selling the property. I am concerned about the capital gains rate increasing. Can I pay the deferred tax owed before I sell the current property?

Unfortunately, there is no way to prepay your taxes based on the current tax rate when you have a property with a low basis from a 1031 exchange. The only trigger to incurring the tax would be the sale. Of course, you would be paying taxes at whatever the prevailing rate is in the year of sale.

There are two ways to avoid the tax. One would be doing another 1031 exchange into another property, which would just be another deferral. The other way is if you hold the property until you die. When you die, your heirs would get a step-up in basis to the fair market value on the date of death. Unlike the 1031 exchange, which is a tax deferral, this step-up in basis is an elimination of the tax. Of course I am just talking about income taxes, not estate taxes. The current (2013) estate tax exemption is $5,250,000

Rob Seltzer is principal of Robert Seltzer, CPA, PFS, in Beverly Hills. You can reach him at (310) 278-9944(310) 278-9944.

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