gains, you’re going to have less money you can reinvest. What a 1031 allows you to do is invest that entire amount so you’re not paying the taxes today, and you can purchase a larger property. You could continually purchase larger and larger properties and continue to use the 1031 exchange pretty much forever. And if you really wanted to — I’m just going to be honest, as it’s easier said than done — you can eventually leave the property to your heirs and they’ll receive that property at the fair market value on the date of your death by eliminating all of this capital gains depreciation recapture that you should have paid during your lifetime. In theory, you can just keep purchasing larger and larger properties, making more and more cashflow, but never actually paying any taxes on that property. In the interview, Castelli also talked about opportunity funds, a new way to possibly put off or completely eliminate capital gains taxes. Opportunity funds are a way to invest in opportunity zones, which low-income communities’ governors have identified, and the Treasury has approved. The funds come with tax incentives, including the ability to defer capital gains on a variety of capital assets. These include not just real estate, but also stocks, bonds, and more. A CPA can give you all the specifics. The timeline has the same 180 rollover as the 1031 exchange, but you’re only required to roll over the capital gain, which means you’re free to do what you want with the money you invested.
Castelli gave this rundown of the numbers:
If you hold that capital gain in the fund for five years, you’re going to receive a 10% stepped-up basis in that gain. Let’s just say you have a $100,000 capital gain, and in five years, you receive the 10% step-up; you’re only going to pay tax on $90,000 of that
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