We as advisors are frequently asked “what entity is best to own investment real estate?” The answer for both income tax and estate tax planning is fairly easy, but we’ll focus on the estate tax planning issues.
We don’t recommend owning real estate in a “c” corporation. From an estate tax perspective, if a shareholder dies, their tax basis in the corporation’s stock receives a step up in value but the assets of the corporation do not.
An “s” corporation is better but for estate tax planning purposes an “s” corporation has the same tax basis problem as a c corporation. If the property is sold after the shareholder’s death, the gain on the sale is based on historic cost and flows through to the shareholder’s estate or beneficiaries. But in order to benefit from the step up they have to dissolve the s corporation or sell their interest to incur a capital loss in the same year as the property is sold. Wait too long and there’s a capital gain in one year, potentially with a tax hit, and a capital loss in the next year that might have limited benefit.
A partnership produces a much better result from an estate tax perspective. Unlike a corporation, if a partner dies the partnership can elect to “step up” that partner’s tax basis in the partnership’s assets. This is especially beneficial for real property because when sold, the estate or beneficiaries will have a lower gain and won’t have to worry about liquidating their interest in the partnership to incur a loss to offset the gain. In particular, we advise using a limited liability company which is a partnership that provides additional protection to the partners.
For more information call Sherry Radmore at 714.569.1000.
