Kim Kyung-Hoon/Reuters/File
A farm tractor hoes a field at a farm in Gaocheng, Hebei province, China, September 30, 2015.

Three unbelievable real estate tax shelters of the rich

Land is expensive for most people, but it might be affordable and cost-saving for the rich. These three real estate tax shelters bring in big savings for the wealthy.

It's no secret that the rich often take advantage of tax shelters and loopholes to minimize their expenses. But some tax loopholes offer a shocking advantage to those who have enough money to exploit them. Here are a few of our favorites.

Investments in Rural Land

Why go small when you can go big? If you can afford it, buy a few acres of rural land. All except one of the 50 states have what's called "use-value assessment," which allows land-buyers to purchase land and sell it at its assessed "use-value" rather than the fair market value, as with other types of real estate — as long as you comply with a few minor guidelines.

The IRS provision was originally created to help farmers hold on to their land. But according to The Nation, the rich are using it as a tax shelter. In 2011, Michael Dell reportedly qualified his $71.4 million 1,757-acre Texas ranch for the tax credit and brought its assessed value to $290,000. They say it takes money to make money, but that kind of tax savings seems more than a bit excessive.

1031 Exchanges

The rich can often offset real estate capital gains or losses with a 1031 Exchange. Section 1031 of the Internal Revenue Code is a provision that allows real estate investors to sell property, take a profit, and defer capital gains or losses as long as the proceeds are reinvested in similar use property.

Not all real estate transactions qualify for 1031s. In order to receive this special tax treatment, the property must be used for trade, business, or investment purposes. Most investors use 1031s to build long-term tax-deferred wealth. There is no limit on the number of 1031 Exchanges you can do. As an example, an investor buys Building A for $300,000. He turns around and sells it for $450,000. That's a profit of $150,000. At the time of the sale, he will owe taxes on the profit. But, if he were to do a 1031 Exchange, he can take the entire $450,000 and invest it in much more expensive Building B, without paying tax. He can again repeat this process for the purchase of Buildings C, D, E, and so on.

Dynasty Trusts

Dynasty Trusts are a form of irrevocable trust used by wealthy families to create generational wealth. With properly formed trusts, your descendants remain exempt from estate, gift, and generation-skipping (GST) tax for the life of the trust.

There are two ways to fund the trust — while you're alive, or upon your death. In either case, your assets, such as real estate property, stocks, bonds, life insurance, etc. are placed within the trust and protected by its provisions. The trust allows your assets to grow exponentially and into infinity in most cases, but are subject to income and capital gains tax either while you're alive or at your death, unless the trust is created in a state that does not impose these taxes — such as Texas, Nevada, or Florida, for example. That's where the possibility of huge tax savings occurs.

Individual states have their own rules governing Dynasty Trusts. If you're interested in transferring real estate and other assets to a trust, please be advised that these are complicated agreements and you should seek the services of an estate planning attorney.

If purchasing 10 acres of rural land, 1031 Exchanges, and Dynasty Trusts are not in your immediate pathway to wealth, but perhaps homeownership and real estate investing are. And as you're on your journey, remember these real estate tax shelters of the wealthy — you might need them someday.

This article first appeared at Wise Bread.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to Three unbelievable real estate tax shelters of the rich
Read this article in
QR Code to Subscription page
Start your subscription today