I recently wrote about “The Effect of Taxes on Investment Performance”. We will also have a podcast coming up to discuss the 1031 Exchange with Bill Exeter and how it can be used to allow compound interest in your real estate investments. Another option investors need to know about is called the “stepped-up basis loophole”. This is the next piece of the generational wealth puzzle.

In my book I discuss how my goal is to create generational wealth through educating my children and setting up a strategy to provide a legacy for my family. This should be the goal of any long-term investor. This can be a part of, or a strategy for an investor’s entire portfolio. The benefit of the stepped-up basis is a benefit Congress and the IRS has provided to even ordinary families, not just the ultra-rich. Under the current law, when you die, real estate, stocks and other assets that you leave to your heirs is inherited at the current value. The receive a step-up in the cost basis of the asset. Think of the cost basis as the original cost for tax purposes.

What this means is that if you purchased a property worth $500,000 with $100,000 down, paid it off over the course of 30 years and it is now worth $2,500,00 and then you pass it on to your children they do not pay tax on the $2,400,000 gain. They can own the property free and clear at a worth of $2,500,000 and owe no tax. You can see how powerful a strategy this can be when utilized along with the 1031 exchange over the course of an investor’s life.  Otherwise, this $2.4M gain would be subject to a 20% capital gains tax, or potentially $480,000 (20% of $2,400,000) or more. Avoiding the tax on this would mean the difference between receiving a $2.5M asset tax-free or only $2,020,000.

So how does this work? You simply gift the money through a trust fund or your will. Even though you only invested $100,000, the new stepped-basis is used as their cost basis. They could turn around and sell the appreciated asset for $2.5M without paying tax! Hopefully they continue a strategy that allows them to continue the compounding process and continue to grow both their passive income and net worth!

My goal is to not only build wealth, but teach my children to be wealthy, and help others to do the same.  You can get a free copy of my book and learn how to invest with us at www.nextlevelincome.com