Many clients who own real estate do not just own one piece of property, they seem to own many pieces of property. When clients start considering options to simplify their estates, selling their real estate portfolio comes to mind. However, this strategy can involve significant time and energy to sell the property as well as the possibility of incurring substantial income tax on the sale.
In 2016 a married couple has an estate tax exemption amount of $10,900,000 before incurring estate tax. If you wait to bequeath the real estate until your death, the property’s cost basis for income tax purposes will “step up” to its fair market value on the date of death. If you hold the real estate until death, the real estate may then be sold soon afterwards and not incur an income tax liability. If your joint property assets are less than $10,900,000 or you are single and your assets are less than $5,450,000, assuming you have not made previous taxable gifts your estate tax will be zero.
Clients should have their real estate portfolio in order. Your spouse, children or other beneficiaries may be real estate savvy, so leveraging your real estate with long term debt may be advisable. Engaging an outside property management company versus doing it yourself allows operations of the real estate to continue without interruption in the event of your death. Your real estate portfolio should be on auto pilot to pass along to your heirs.
We have a client who sold a business and retained ownership of the commercial real estate. The income tax basis of the real estate is very low and a sale will result in a large amount of taxable income that would reduce the estate. Since the current property is a commercial single tenant site, the client would like to minimize risk by switching to a lower risk apartment building. LSL has recommended trading the commercial real estate for an apartment building using a tax deferred 1031 exchange. The property will then be retained until the owner passes away, and at that time the property will receive a step up in income tax basis and if the heirs want to sell the apartment they will not incur an income tax liability.
We can help structure your estate to ensure the lowest income tax and estate tax consequences and to better position your assets for a stressless transition.
For more information on real estate tax and estate planning contact LSL CPAs at 714.672.0022.
