1031 exchange question

[Tommy Sowell]

Question about the California Claw Back Rule:

We 1031 exchanged California property for Hawaii property. If we 1031 exchanged tin Hawaii property for another one do we have to pay tax on the money deferred?

[Clayton Mobley]

@Tommy Sowell As long as you continue to execute 1031 exchanges, you continue to defer the taxes on your gain and your depreciation recapture, as @Jacqueline Gardiner correctly stated. She is also correct that a popular and effective strategy is what I call '1031, 1031, Die' - maybe a bit morbid, but apt. 

If you ONLY sell props via 1031 exchanges, then leave your final props to your heirs, you avoid taxation entirely in your lifetime. Because the properties are inherited, your heirs received a 'stepped up' tax basis equal to the property fair market value at the time of your passing. 

So, essentially, if you die on a Monday and they sell the properties on Tuesday, your heirs could conceivably sell the properties with zero tax liability (since the market price on Monday = their tax basis AND the sales price, more or less). If they hold the properties as rentals and sell down the road, they only owe taxes on the gains and depreciation recapture accrued since your death - or they could 1031 exchange and continue the cycle.

I believe it was the very wise @Dave Foster that recently said 'You can live tax-deferred but you gotta die to be tax-free'