Question on inheriting real estate from parents

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jplee3
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Joined: Thu Nov 13, 2014 9:15 pm

Question on inheriting real estate from parents

Post by jplee3 » Sat Dec 02, 2017 10:03 pm

Hey all,

So my dad has been burdening with my brothers and I to find a solution to inherit a few rental/investment properties of theirs in order to reduce overall tax burden/liability both for them and for us.

There have been questions around how to utilize and take advantage of the $14k gift exclusion as well as the lifetime gift exclusion, of which the latter I'm not as privy to.

One suggestion that has vaguely come up is to form an LLC. I've told my dad to speak with his CPA and estate attorney but I think he's shooting them very specific/cherry-picked questions rather than describing his overall intention.

Anyway, was looking for some general direction here. They own a couple properties up in Northern California and have talked about gifting them to us so we can either continue renting them out (except they're in a not-so-great situation where they're renting WAY below market rents in an area that's strictly rent-controlled). The third property they own is actually the one my family and I reside in and is currently a TIC property where I have about 25% ownership and they have 75%. We were initially talking about them having us buy out their portion by taking a private loan from the trust, etc. Oh and yes, on that note they do have a revocable trust setup.

Any pointers on which way to go from here? I know there's probably not quite enough info but I'm not looking for a full-fledged plan - I realize the CPA and lawyer would be best utilized for that anyway.

Stormbringer
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Re: Question on inheriting real estate from parents

Post by Stormbringer » Sun Dec 03, 2017 9:52 am

Well, you might want to wait a few weeks and see how tax reform shakes out, because estate taxes are in play.

As it stands today, you get a step-up in tax basis, so they should pass to you tax-free (unless they are quite large) and with no built-in capital gain. I think it might also wipe out the depreciation recapture, but I'm not 100% sure on that. I'm sure someone else on the forum would know.

Also, if they are titled to your dad as an individual when they are passed to you, that might be a good opportunity to quit-claim them to an LLC at the new, stepped up basis.

Gifting a fraction of them to you now seems unnecessary, and might involve considerable paperwork and costs.
"Compound interest is the most powerful force in the universe." - Albert Einstein

jplee3
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Re: Question on inheriting real estate from parents

Post by jplee3 » Sun Dec 03, 2017 12:32 pm

Stormbringer wrote:
Sun Dec 03, 2017 9:52 am
Well, you might want to wait a few weeks and see how tax reform shakes out, because estate taxes are in play.

As it stands today, you get a step-up in tax basis, so they should pass to you tax-free (unless they are quite large) and with no built-in capital gain. I think it might also wipe out the depreciation recapture, but I'm not 100% sure on that. I'm sure someone else on the forum would know.

Also, if they are titled to your dad as an individual when they are passed to you, that might be a good opportunity to quit-claim them to an LLC at the new, stepped up basis.

Gifting a fraction of them to you now seems unnecessary, and might involve considerable paperwork and costs.
In terms of getting a step-up in tax basis and passing onto us tax-free, that's if my parents continue just to own them outright until death when we inherit them (per the trust)?

When you say "quit-claim them to an LLC" is that also in the context of once my parents have passed and we are working with what's in the trust?

I guess the main issue is that my parents don't "need" or necessarily want the extra income generated from these assets - part of it is to reduce their estate currently so that their tax liability is less. They'd like to do that now especially if we could use the extra income... I wouldn't mind it but I guess my brothers would have to be aligned. So far my second oldest brother has expressed some interest and I haven't heard anything from the oldest. It almost seems like the side-agenda here is my dad trying to get my brothers and I to think about starting a business or at least partnering together to invest and bring in additional income for all our families.

chevca
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Re: Question on inheriting real estate from parents

Post by chevca » Sun Dec 03, 2017 12:40 pm

For the step-up basis, yes, they would have to be passed onto you guys after the parents passed away.

I don't think they can just gift you and the brothers the rental properties, or portions of, now when they still own them. I'm not sure on that though.

It doesn't sound like a good deal with the rents being below average and owning the business with your brothers. That just seems like more bad than good would come from that.

What about just selling them now and adding the proceed to the parents' portfolio. Sure, that causes a tax hit. But, if they don't want to own them and don't need the income and don't want to hold onto them until they pass away.....

Gill
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Re: Question on inheriting real estate from parents

Post by Gill » Sun Dec 03, 2017 12:44 pm

You speak in terms of "they". Is your mother or his wife still living also? Would their combined estates exceed $10 million or so? If not, they really have no worry about Federal estate tax, although possibly there could be state estate tax.
Gill

Stormbringer
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Re: Question on inheriting real estate from parents

Post by Stormbringer » Sun Dec 03, 2017 3:02 pm

jplee3 wrote:
Sun Dec 03, 2017 12:32 pm
In terms of getting a step-up in tax basis and passing onto us tax-free, that's if my parents continue just to own them outright until death when we inherit them (per the trust)?

When you say "quit-claim them to an LLC" is that also in the context of once my parents have passed and we are working with what's in the trust?

I guess the main issue is that my parents don't "need" or necessarily want the extra income generated from these assets - part of it is to reduce their estate currently so that their tax liability is less. They'd like to do that now especially if we could use the extra income... I wouldn't mind it but I guess my brothers would have to be aligned. So far my second oldest brother has expressed some interest and I haven't heard anything from the oldest. It almost seems like the side-agenda here is my dad trying to get my brothers and I to think about starting a business or at least partnering together to invest and bring in additional income for all our families.
Yes, the step-up in basis is for estates, not gifts.

Here's the problem. Say they bought a property many years ago for $100K, and now it is worth $300K. It is a ticking tax-bomb. Not only is there a $200K capital gain, but the building has been depreciated and that must be recaptured upon sale. Waiting until they pass away makes all that tax liability disappear, saving many tens of thousands of dollars.

If they gift it to you, you lose the step-up in tax basis forever. Not taking advantage of that is a huge giveaway to the government.

The best thing is probably going to be for them to retain ownership until death. If they don't need the income, they can EACH gift EACH of you (including spouses, if necessary) $14,000 a year until then. Any income taxes they save now by giving you the properties will be dwarfed by the huge tax burden they will create for you and your brothers.
"Compound interest is the most powerful force in the universe." - Albert Einstein

afan
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Re: Question on inheriting real estate from parents

Post by afan » Sun Dec 03, 2017 3:54 pm

Depending on how much the properties and the total estate are worth there are several things an estate attorney could suggest to reduce estate tax exposure. The rules may be changing very soon, so it makes sense to ask the questions but wait until there is clarity about the answers.

Your parents might want an LLC, a limited partnership or both to hold the properties. Depending on how much gain they have in the properties it may be very expensive to sell them off.

It might not be a good idea to gift you shares of the properties for the reasons Stormbringer raises. But it might make sense for them to gift the income. A married couple can give each individual double the annual exclusion amount, one for each donor.

If they want to gift larger amounts then there are estate planning methods with discounted valuations in limited partnerahips that can help. But you definitely need an expert attorney to set that up.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

jplee3
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Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Sun Dec 03, 2017 5:45 pm

Gill wrote:
Sun Dec 03, 2017 12:44 pm
You speak in terms of "they". Is your mother or his wife still living also? Would their combined estates exceed $10 million or so? If not, they really have no worry about Federal estate tax, although possibly there could be state estate tax.
Gill

Yes, this is both my parents who are still living. I'm not sure if their combined estates exceed $10 million but if I had to guess I'd say no.

jplee3
Posts: 63
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Re: Question on inheriting real estate from parents

Post by jplee3 » Sun Dec 03, 2017 5:56 pm

chevca wrote:
Sun Dec 03, 2017 12:40 pm
For the step-up basis, yes, they would have to be passed onto you guys after the parents passed away.

I don't think they can just gift you and the brothers the rental properties, or portions of, now when they still own them. I'm not sure on that though.

It doesn't sound like a good deal with the rents being below average and owning the business with your brothers. That just seems like more bad than good would come from that.

What about just selling them now and adding the proceed to the parents' portfolio. Sure, that causes a tax hit. But, if they don't want to own them and don't need the income and don't want to hold onto them until they pass away.....
Yea, this is why my dad was considering putting them into the DST (Delaware Statutory Trust) via 1031 exchange and allowing the funds to continue growing tax-deferred/tax-free (? I'm not sure how it works exactly). I guess my concern would then be what happens once they pass and we want to get the money out of the DST - is the exit easy on those? Can you 1031 it back into standard real estate?

jplee3
Posts: 63
Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Sun Dec 03, 2017 6:24 pm

Stormbringer wrote:
Sun Dec 03, 2017 3:02 pm
jplee3 wrote:
Sun Dec 03, 2017 12:32 pm
In terms of getting a step-up in tax basis and passing onto us tax-free, that's if my parents continue just to own them outright until death when we inherit them (per the trust)?

When you say "quit-claim them to an LLC" is that also in the context of once my parents have passed and we are working with what's in the trust?

I guess the main issue is that my parents don't "need" or necessarily want the extra income generated from these assets - part of it is to reduce their estate currently so that their tax liability is less. They'd like to do that now especially if we could use the extra income... I wouldn't mind it but I guess my brothers would have to be aligned. So far my second oldest brother has expressed some interest and I haven't heard anything from the oldest. It almost seems like the side-agenda here is my dad trying to get my brothers and I to think about starting a business or at least partnering together to invest and bring in additional income for all our families.
Yes, the step-up in basis is for estates, not gifts.

Here's the problem. Say they bought a property many years ago for $100K, and now it is worth $300K. It is a ticking tax-bomb. Not only is there a $200K capital gain, but the building has been depreciated and that must be recaptured upon sale. Waiting until they pass away makes all that tax liability disappear, saving many tens of thousands of dollars.

If they gift it to you, you lose the step-up in tax basis forever. Not taking advantage of that is a huge giveaway to the government.

The best thing is probably going to be for them to retain ownership until death. If they don't need the income, they can EACH gift EACH of you (including spouses, if necessary) $14,000 a year until then. Any income taxes they save now by giving you the properties will be dwarfed by the huge tax burden they will create for you and your brothers.
Thanks! So generally, it would make sense to avoid any sort of gifting at this point with such a huge gain of appreciation in the real estate assets. And waiting for them to go into the trust is a better idea so as to remove that tax liability due to the step-up in tax basis.

As far as gifting each of us up to the gift exclusion, that doesn't do much in terms of reducing their current tax liability right? They would owe on income taxes from the properties and they would be gifting us those after-tax dollars, effectively. I could see how my parents *wouldn't* want to just do this then because they'd feel like they're just throwing their money away. At the same time, wouldn't it slowly increase their overall estate (and thereby taxes) anyway? So it would be to their benefit to just gift the money to us at the end of the day no? I guess that or start donating larger amounts of their money to charity.

ecoe
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Re: Question on inheriting real estate from parents

Post by ecoe » Sun Dec 03, 2017 10:54 pm

One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).

jplee3
Posts: 63
Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Mon Dec 04, 2017 12:08 am

ecoe wrote:
Sun Dec 03, 2017 10:54 pm
One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).
Thanks. Will have to take that into consideration too, especially with how that would work in the context of an LLC.

They've owned these properties for a long time - at least a decade or more. And yes, from one of the properties I checked property tax is ridiculously low... based on the *actual* assessed value of what any property of it's type should be LOL

Carefreeap
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Re: Question on inheriting real estate from parents

Post by Carefreeap » Mon Dec 04, 2017 2:29 pm

jplee3 wrote:
Mon Dec 04, 2017 12:08 am
ecoe wrote:
Sun Dec 03, 2017 10:54 pm
One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).
Thanks. Will have to take that into consideration too, especially with how that would work in the context of an LLC.

They've owned these properties for a long time - at least a decade or more. And yes, from one of the properties I checked property tax is ridiculously low... based on the *actual* assessed value of what any property of it's type should be LOL
I'm glad that someone else brought up the parent to child transfer but do look it up. An LLC is not going to qualify but a Trust could. And while the family home is exempt there are limits to investment property. I think it's $1M which doesn't mean much any more in coastal metro markets. Not sure if the properties are in SF or another county.

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm

Since CA is a community property state don't forget that when the first parent passes the assets are fully stepped up (not just half).

From personal experience, I'd be more focused on how those properties are going to be divided (or sold) after death. Nothing like the final passing of a parent to bring out the worst in sibling rivalry when there's money involved.

jplee3
Posts: 63
Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Mon Dec 04, 2017 3:23 pm

Carefreeap wrote:
Mon Dec 04, 2017 2:29 pm
jplee3 wrote:
Mon Dec 04, 2017 12:08 am
ecoe wrote:
Sun Dec 03, 2017 10:54 pm
One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).
Thanks. Will have to take that into consideration too, especially with how that would work in the context of an LLC.

They've owned these properties for a long time - at least a decade or more. And yes, from one of the properties I checked property tax is ridiculously low... based on the *actual* assessed value of what any property of it's type should be LOL
I'm glad that someone else brought up the parent to child transfer but do look it up. An LLC is not going to qualify but a Trust could. And while the family home is exempt there are limits to investment property. I think it's $1M which doesn't mean much any more in coastal metro markets. Not sure if the properties are in SF or another county.

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm

Since CA is a community property state don't forget that when the first parent passes the assets are fully stepped up (not just half).

From personal experience, I'd be more focused on how those properties are going to be divided (or sold) after death. Nothing like the final passing of a parent to bring out the worst in sibling rivalry when there's money involved.
Good points - my dad keeps talking about opening a family LLC which I'm not so sure is a great idea. He really seems to want to offload these properties for some reason all of the sudden. He keeps saying it's not for a tax shelter and is for us to reinvest for extra income. However, it seems to our own benefit that waiting for it via the trust is a better option regardless... of course, he seems to be wanting to unload these regardless and that's where the 1031 DST comes into play, presumably, if we don't want to take them now.

The properties they own up there probably total over $1M combined for sure

So when the first parent passes and the assets are fully stepped up, does that mean they could at that point just sell/transfer the properties and not worry about capital gains taxes versus if they were try to sell or transfer everything now while both are living?

As far as dividing everything, their default is just to split everything in thirds since it's the three of us brothers.

Carefreeap
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Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Question on inheriting real estate from parents

Post by Carefreeap » Mon Dec 04, 2017 8:32 pm

jplee3 wrote:
Mon Dec 04, 2017 3:23 pm
Carefreeap wrote:
Mon Dec 04, 2017 2:29 pm
jplee3 wrote:
Mon Dec 04, 2017 12:08 am
ecoe wrote:
Sun Dec 03, 2017 10:54 pm
One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).
Thanks. Will have to take that into consideration too, especially with how that would work in the context of an LLC.

They've owned these properties for a long time - at least a decade or more. And yes, from one of the properties I checked property tax is ridiculously low... based on the *actual* assessed value of what any property of it's type should be LOL
I'm glad that someone else brought up the parent to child transfer but do look it up. An LLC is not going to qualify but a Trust could. And while the family home is exempt there are limits to investment property. I think it's $1M which doesn't mean much any more in coastal metro markets. Not sure if the properties are in SF or another county.

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm

Since CA is a community property state don't forget that when the first parent passes the assets are fully stepped up (not just half).

From personal experience, I'd be more focused on how those properties are going to be divided (or sold) after death. Nothing like the final passing of a parent to bring out the worst in sibling rivalry when there's money involved.
Good points - my dad keeps talking about opening a family LLC which I'm not so sure is a great idea. He really seems to want to offload these properties for some reason all of the sudden. He keeps saying it's not for a tax shelter and is for us to reinvest for extra income. However, it seems to our own benefit that waiting for it via the trust is a better option regardless... of course, he seems to be wanting to unload these regardless and that's where the 1031 DST comes into play, presumably, if we don't want to take them now.

The properties they own up there probably total over $1M combined for sure

So when the first parent passes and the assets are fully stepped up, does that mean they could at that point just sell/transfer the properties and not worry about capital gains taxes versus if they were try to sell or transfer everything now while both are living?

As far as dividing everything, their default is just to split everything in thirds since it's the three of us brothers.
You'll inherit at the stepped up value and you won't have to worry about depreciation recapture et cetera. Not sure what kind of structure their estate would be using but either those properties 1) Go through probate and the Executor sells or transfers the assets to the heirs, 2)the properties are in Trust and avoid the probate process and they could remain in the Trust, be distributed or whatever the Trust says or 3) a relatively newish option in CA would be a beneficiary deed whereby title says with your folks but the three of you are the named beneficiaries and wind up being co-titled on the property. The third option does avoid probate but brings up some other issues such as do you really want to share title with your sibs? I know I will never, ever co-own anything with my financial trainwreck of a brother.

It probably makes the most sense for your folks to look into getting a living Trust.

jplee3
Posts: 63
Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Mon Dec 04, 2017 9:16 pm

Carefreeap wrote:
Mon Dec 04, 2017 8:32 pm
jplee3 wrote:
Mon Dec 04, 2017 3:23 pm
Carefreeap wrote:
Mon Dec 04, 2017 2:29 pm
jplee3 wrote:
Mon Dec 04, 2017 12:08 am
ecoe wrote:
Sun Dec 03, 2017 10:54 pm
One more thing to give some serious consideration to when making this decision is that Prop. 13 allows children to maintain the lower property taxes of the parents when inheriting property. I don't know how that works when multiple children inherit but it is worth looking into. If your parents have owned in CA for a long time then the difference between their current property tax and what others would pay if they recently acquired the properties could be significant (that may be the understatement of the year).
Thanks. Will have to take that into consideration too, especially with how that would work in the context of an LLC.

They've owned these properties for a long time - at least a decade or more. And yes, from one of the properties I checked property tax is ridiculously low... based on the *actual* assessed value of what any property of it's type should be LOL
I'm glad that someone else brought up the parent to child transfer but do look it up. An LLC is not going to qualify but a Trust could. And while the family home is exempt there are limits to investment property. I think it's $1M which doesn't mean much any more in coastal metro markets. Not sure if the properties are in SF or another county.

http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm

Since CA is a community property state don't forget that when the first parent passes the assets are fully stepped up (not just half).

From personal experience, I'd be more focused on how those properties are going to be divided (or sold) after death. Nothing like the final passing of a parent to bring out the worst in sibling rivalry when there's money involved.
Good points - my dad keeps talking about opening a family LLC which I'm not so sure is a great idea. He really seems to want to offload these properties for some reason all of the sudden. He keeps saying it's not for a tax shelter and is for us to reinvest for extra income. However, it seems to our own benefit that waiting for it via the trust is a better option regardless... of course, he seems to be wanting to unload these regardless and that's where the 1031 DST comes into play, presumably, if we don't want to take them now.

The properties they own up there probably total over $1M combined for sure

So when the first parent passes and the assets are fully stepped up, does that mean they could at that point just sell/transfer the properties and not worry about capital gains taxes versus if they were try to sell or transfer everything now while both are living?

As far as dividing everything, their default is just to split everything in thirds since it's the three of us brothers.
You'll inherit at the stepped up value and you won't have to worry about depreciation recapture et cetera. Not sure what kind of structure their estate would be using but either those properties 1) Go through probate and the Executor sells or transfers the assets to the heirs, 2)the properties are in Trust and avoid the probate process and they could remain in the Trust, be distributed or whatever the Trust says or 3) a relatively newish option in CA would be a beneficiary deed whereby title says with your folks but the three of you are the named beneficiaries and wind up being co-titled on the property. The third option does avoid probate but brings up some other issues such as do you really want to share title with your sibs? I know I will never, ever co-own anything with my financial trainwreck of a brother.

It probably makes the most sense for your folks to look into getting a living Trust.
My parents have a revocable living trust already and these properties are in it. So I think #2 definitely applies. I think my dad is just wanting us to take the 'burden' of owning these off his plate while allowing us to generate income for ourselves.

The idea mentioned earlier about them just gifting us the income is palatable except it doesn't meet his requirements to not have to deal with the burden of the properties... honestly, I don't know what's so burdensome about these other than the fact that he's getting taxed on them. The tenants they have are good because they're paying well-below market rents. So I guess part of it is my dad may realize this and thinks it's a waste in the sense that he's not maximizing on optimized rents for highest returns (though, I'd find this odd as that would only increase his income taxation too).
Anyway, going back to the whole gifting us income, I think both my parents sort of feel like they'd just be throwing their money away to us and that there's something wrong with that or they have some stigma about it... I think part of it might be "work hard, make your own money and pay taxes on your own stuff" which is ironic considering all this is about *investment* assets that are generating income as-is lol.

So I think he's trying to kill a few birds with one stone: 1) unload properties to get rid of current income taxation burden they have 2) not deal with rental issues or feeling bad that they've pigeonholed themselves with lower-than-market rent in a rent-controlled area and 3) 'help' us generate more income *now*
I'm just not sure or convinced that him trying to setup a family LLC for these properties is in the best interest of everyone. Especially if everyone doesn't want to invest in real estate or similar. Not to mention how it sounds like we're going to have to deal with getting hit with capital gains taxes.

Carefreeap
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Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Question on inheriting real estate from parents

Post by Carefreeap » Mon Dec 04, 2017 10:31 pm

jplee3 wrote:
Mon Dec 04, 2017 9:16 pm
You'll inherit at the stepped up value and you won't have to worry about depreciation recapture et cetera. Not sure what kind of structure their estate would be using but either those properties 1) Go through probate and the Executor sells or transfers the assets to the heirs, 2)the properties are in Trust and avoid the probate process and they could remain in the Trust, be distributed or whatever the Trust says or 3) a relatively newish option in CA would be a beneficiary deed whereby title says with your folks but the three of you are the named beneficiaries and wind up being co-titled on the property. The third option does avoid probate but brings up some other issues such as do you really want to share title with your sibs? I know I will never, ever co-own anything with my financial trainwreck of a brother.

It probably makes the most sense for your folks to look into getting a living Trust.
[/quote]

My parents have a revocable living trust already and these properties are in it. So I think #2 definitely applies. I think my dad is just wanting us to take the 'burden' of owning these off his plate while allowing us to generate income for ourselves.

The idea mentioned earlier about them just gifting us the income is palatable except it doesn't meet his requirements to not have to deal with the burden of the properties... honestly, I don't know what's so burdensome about these other than the fact that he's getting taxed on them. The tenants they have are good because they're paying well-below market rents. So I guess part of it is my dad may realize this and thinks it's a waste in the sense that he's not maximizing on optimized rents for highest returns (though, I'd find this odd as that would only increase his income taxation too).
Anyway, going back to the whole gifting us income, I think both my parents sort of feel like they'd just be throwing their money away to us and that there's something wrong with that or they have some stigma about it... I think part of it might be "work hard, make your own money and pay taxes on your own stuff" which is ironic considering all this is about *investment* assets that are generating income as-is lol.

So I think he's trying to kill a few birds with one stone: 1) unload properties to get rid of current income taxation burden they have 2) not deal with rental issues or feeling bad that they've pigeonholed themselves with lower-than-market rent in a rent-controlled area and 3) 'help' us generate more income *now*
I'm just not sure or convinced that him trying to setup a family LLC for these properties is in the best interest of everyone. Especially if everyone doesn't want to invest in real estate or similar. Not to mention how it sounds like we're going to have to deal with getting hit with capital gains taxes.
[/quote]

Lol, I'd call this the case of first world problems. :wink:

We sold two San Diego properties over the last two years because we were tired of dealing with properties 500 miles away. I get the tenant hassle problem even with good tenants. Something is always breaking or wearing out with real estate. We still have two more properties but they are a lot less hassle.

One option might be to sell you the TIC (I'm assuming they own the whole building?) on a note and forgive the interest and principle payments each year. They would still need to deal with the depreciation recapture but you might be able to structure a deal with either bringing in cash yourself or getting a new first TD. They will pay cap gains tax based on the principle "paid" (457 installment sale) and ordinary income tax on the interest. You would get the property tax transfer now. The gift tax reporting is $14,500 per person per year which could be handled a few different ways. If you are married that could be as much as $29k a year. And remember the limit is just a reporting requirement. They can gift as much as they want up to the estate limit, they just need to report it. They could gift your brothers similar amounts in cash or other equities.

I'm sure there are some other creative options. They should be talking to a licensed CPA in CA and model some different scenarios.

jplee3
Posts: 63
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Re: Question on inheriting real estate from parents

Post by jplee3 » Mon Dec 04, 2017 10:56 pm

Carefreeap wrote:
Mon Dec 04, 2017 10:31 pm
jplee3 wrote:
Mon Dec 04, 2017 9:16 pm



You'll inherit at the stepped up value and you won't have to worry about depreciation recapture et cetera. Not sure what kind of structure their estate would be using but either those properties 1) Go through probate and the Executor sells or transfers the assets to the heirs, 2)the properties are in Trust and avoid the probate process and they could remain in the Trust, be distributed or whatever the Trust says or 3) a relatively newish option in CA would be a beneficiary deed whereby title says with your folks but the three of you are the named beneficiaries and wind up being co-titled on the property. The third option does avoid probate but brings up some other issues such as do you really want to share title with your sibs? I know I will never, ever co-own anything with my financial trainwreck of a brother.

It probably makes the most sense for your folks to look into getting a living Trust.
My parents have a revocable living trust already and these properties are in it. So I think #2 definitely applies. I think my dad is just wanting us to take the 'burden' of owning these off his plate while allowing us to generate income for ourselves.

The idea mentioned earlier about them just gifting us the income is palatable except it doesn't meet his requirements to not have to deal with the burden of the properties... honestly, I don't know what's so burdensome about these other than the fact that he's getting taxed on them. The tenants they have are good because they're paying well-below market rents. So I guess part of it is my dad may realize this and thinks it's a waste in the sense that he's not maximizing on optimized rents for highest returns (though, I'd find this odd as that would only increase his income taxation too).
Anyway, going back to the whole gifting us income, I think both my parents sort of feel like they'd just be throwing their money away to us and that there's something wrong with that or they have some stigma about it... I think part of it might be "work hard, make your own money and pay taxes on your own stuff" which is ironic considering all this is about *investment* assets that are generating income as-is lol.

So I think he's trying to kill a few birds with one stone: 1) unload properties to get rid of current income taxation burden they have 2) not deal with rental issues or feeling bad that they've pigeonholed themselves with lower-than-market rent in a rent-controlled area and 3) 'help' us generate more income *now*
I'm just not sure or convinced that him trying to setup a family LLC for these properties is in the best interest of everyone. Especially if everyone doesn't want to invest in real estate or similar. Not to mention how it sounds like we're going to have to deal with getting hit with capital gains taxes.
Lol, I'd call this the case of first world problems. :wink:

We sold two San Diego properties over the last two years because we were tired of dealing with properties 500 miles away. I get the tenant hassle problem even with good tenants. Something is always breaking or wearing out with real estate. We still have two more properties but they are a lot less hassle.

One option might be to sell you the TIC (I'm assuming they own the whole building?) on a note and forgive the interest and principle payments each year. They would still need to deal with the depreciation recapture but you might be able to structure a deal with either bringing in cash yourself or getting a new first TD. They will pay cap gains tax based on the principle "paid" (457 installment sale) and ordinary income tax on the interest. You would get the property tax transfer now. The gift tax reporting is $14,500 per person per year which could be handled a few different ways. If you are married that could be as much as $29k a year. And remember the limit is just a reporting requirement. They can gift as much as they want up to the estate limit, they just need to report it. They could gift your brothers similar amounts in cash or other equities.

I'm sure there are some other creative options. They should be talking to a licensed CPA in CA and model some different scenarios.
When you refer to selling the TIC, are you referring to what I mentioned earlier about the property my family and I live in? If so, it's a bottom unit condo that we're in - they structured the ownership so that they own 75% currently and I own 25% (I initially put a 'downpayment' down which counts towards my 25% and then took a private interest-free loan with them to pay off my 25% which we're slowly paying off still but could fully pay off if we wanted to at any time). They've discussed having us buy them out for the entire thing where they would 'gift' us early inheritance of this. My brothers still own a third in the place each, so they were also encouraging us to buy them out. Effectively, I would be in a situation where I owned 50% of the property and took a loan on the remaining 50% against my brothers' inheritance in the trust. We'd be repaying the trust back at that point in time. Not sure if that makes any sense but that's what we were wanting to do.

As far as the other properties are concerned in Northern CA, I wouldn't know how to deal with those but maybe the same thing? Have my parents do TIC on those properties with my brothers and I? It complicates things that my immediate family lives in one of the investment properties though...

Sandi_k
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Re: Question on inheriting real estate from parents

Post by Sandi_k » Tue Dec 05, 2017 2:12 pm

IIWY, I'd be refinancing the Condo TIC that I lived in and buy out the parents. That gives them cash, which will be left 1/3 to each of the brothers without the complications of you co-owning property with siblings.

For the other two properties, I'd encourage my parents to keep holding on, and possibly hiring a management company to relieve the headaches for them. Point out to your dad that the taxes saved when the surviving spouse inherits on a step-up basis is a huge savings, and totally worth not forming an LLC for now. Then the surviving spouse can sell the two remaining properties, and incur no capital gains.

Simple and tax smart.

miamivice
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Re: Question on inheriting real estate from parents

Post by miamivice » Tue Dec 05, 2017 2:21 pm

I glanced through the above posts but didn't see it mentioned.

The current estate tax only affects people with more than $5.25 million in assets. (With estate planning, a married couple can pass $10.5 million to the heirs tax free)

Is the estate worth more than $5.25 million? If not there is no issue.

jplee3
Posts: 63
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Re: Question on inheriting real estate from parents

Post by jplee3 » Tue Dec 05, 2017 2:40 pm

Sandi_k wrote:
Tue Dec 05, 2017 2:12 pm
IIWY, I'd be refinancing the Condo TIC that I lived in and buy out the parents. That gives them cash, which will be left 1/3 to each of the brothers without the complications of you co-owning property with siblings.

For the other two properties, I'd encourage my parents to keep holding on, and possibly hiring a management company to relieve the headaches for them. Point out to your dad that the taxes saved when the surviving spouse inherits on a step-up basis is a huge savings, and totally worth not forming an LLC for now. Then the surviving spouse can sell the two remaining properties, and incur no capital gains.

Simple and tax smart.
My dad checked with his CPA who suggested that they gift us the two properties up there and we do a 1031 exchange on them. I get his point of using a 1031 to defer taxes, but doesn't that not quite apply to this situation? I though the act of gifting early will trigger depreciation recapture regardless... is this collected when we decide to sell later on? If the latter, it seems like doing this way we'd kind of be stuck with keeping these properties forever or we'd have to accept the big depreciation recapture come time to sell.

Per my understanding, if we just inherited the properties on a stepped-up basis, the depreciation recapture would be minimized and we wouldn't get such a hit. So if my dad passes my mom could *then* gift us the properties and we wouldn't be stuck in the situation of having to hold onto the properties to avoid the recapture hit - it would just give us better options as to whether we want to keep them or cash them out without worrying about getting taxed a lot more.

Also it's a bit hard for me to understand the concept of deprecation recapture. Would someone be willing to help with that understanding given the following numbers/context?

Original purchase price my parents paid for the condo up north: $30k
Current value of the same condo now: $450k

So this would mean a gain of $420 but how is depreciation recapture calculated based on that? Also, if he gifts it to us, our basis would be $30k right? So would we then be responsible for the cap gains of $420k at the point at which we decide to sell? EDIT: Found this - https://www.thebalance.com/the-gift-of- ... ng-3973972 - I asked my dad what he has claimed for depreciation on all the properties. Not sure if even he would know! I figure it would be recorded in taxes, etc though...

So if one of our parents passes then the stepped-up basis would be $450k right? Versus if they gifted it early, where the cost basis of $30k would then be passed on to us, which results in the much bigger tax implications?

jplee3
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Re: Question on inheriting real estate from parents

Post by jplee3 » Wed Dec 06, 2017 8:04 pm

So I spoke with my CPA. She confirmed receiving by inheritance is the best idea here versus gifting, so as to avoid receiving the original cost basis and incurring the cap gains on those.

I asked about depreciation recapture and she was mentioning she didn't think that would be as big of an issue. Either way, avoid receiving an early gift regardless.

I also asked about my dad's plan to put the properties into an LLC - she mentioned that might be an ok idea depending on what our goals are. If it's to receive additional income, then it may help as we can allocate % ownership and the proportional income taxes based on that. She mentioned that she thinks the properties being in an LLC doesn't disqualify us from receiving a stepped-up basis on them once either or both of our parents pass. However, she wasn't 100% sure on this particularly in the context of split-ownership and wanted to research it. I figured I'd ask here in the meantime: "Is the step-up basis of any given inherited property affected by the percentage of ownership dictated by the LLC? e.g. If my parents own 25% of the LLC and my two brothers and I each own 25%, would the step-up basis be in proportion to their 25% ownership?"

Carefreeap
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Re: Question on inheriting real estate from parents

Post by Carefreeap » Wed Dec 06, 2017 8:13 pm

jplee3 wrote:
Wed Dec 06, 2017 8:04 pm
So I spoke with my CPA. She confirmed receiving by inheritance is the best idea here versus gifting, so as to avoid receiving the original cost basis and incurring the cap gains on those.

I asked about depreciation recapture and she was mentioning she didn't think that would be as big of an issue. Either way, avoid receiving an early gift regardless.

I also asked about my dad's plan to put the properties into an LLC - she mentioned that might be an ok idea depending on what our goals are. If it's to receive additional income, then it may help as we can allocate % ownership and the proportional income taxes based on that. She mentioned that she thinks the properties being in an LLC doesn't disqualify us from receiving a stepped-up basis on them once either or both of our parents pass. However, she wasn't 100% sure on this particularly in the context of split-ownership and wanted to research it. I figured I'd ask here in the meantime: "Is the step-up basis of any given inherited property affected by the percentage of ownership dictated by the LLC? e.g. If my parents own 25% of the LLC and my two brothers and I each own 25%, would the step-up basis be in proportion to their 25% ownership?"
Seems to me that you're still going to have the same issue if they "gift" you your 25% share of the LLC now vs inheriting the LLC and splitting it 3 ways at time of death.

I'd also look into whether the LLC will affect their Prop 13 basis and the parent to child transfer exemption.

jplee3
Posts: 63
Joined: Thu Nov 13, 2014 9:15 pm

Re: Question on inheriting real estate from parents

Post by jplee3 » Wed Dec 06, 2017 9:42 pm

Carefreeap wrote:
Wed Dec 06, 2017 8:13 pm
jplee3 wrote:
Wed Dec 06, 2017 8:04 pm
So I spoke with my CPA. She confirmed receiving by inheritance is the best idea here versus gifting, so as to avoid receiving the original cost basis and incurring the cap gains on those.

I asked about depreciation recapture and she was mentioning she didn't think that would be as big of an issue. Either way, avoid receiving an early gift regardless.

I also asked about my dad's plan to put the properties into an LLC - she mentioned that might be an ok idea depending on what our goals are. If it's to receive additional income, then it may help as we can allocate % ownership and the proportional income taxes based on that. She mentioned that she thinks the properties being in an LLC doesn't disqualify us from receiving a stepped-up basis on them once either or both of our parents pass. However, she wasn't 100% sure on this particularly in the context of split-ownership and wanted to research it. I figured I'd ask here in the meantime: "Is the step-up basis of any given inherited property affected by the percentage of ownership dictated by the LLC? e.g. If my parents own 25% of the LLC and my two brothers and I each own 25%, would the step-up basis be in proportion to their 25% ownership?"
Seems to me that you're still going to have the same issue if they "gift" you your 25% share of the LLC now vs inheriting the LLC and splitting it 3 ways at time of death.

I'd also look into whether the LLC will affect their Prop 13 basis and the parent to child transfer exemption.
The discussion about the LLC is to open one with them jointly - they don't currently have one now. We would open it jointly and they would be putting their properties into it. Wouldn't "gifting" a share of the LLC to us be: them putting properties into an LLC and opening it on their own, then adding us on later and saying "here why don't you take 25% of this"

The questions you suggested I think are along the lines of what I'm asking regarding whether or not % of ownership affects the stepped-up basis and how (assuming parent to child transfers are also allowed in the context of LLCs)

clutchied
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Re: Question on inheriting real estate from parents

Post by clutchied » Thu Dec 07, 2017 8:34 am

jplee3 wrote:
Sat Dec 02, 2017 10:03 pm
Hey all,

So my dad has been burdening with my brothers and I to find a solution to inherit a few rental/investment properties of theirs in order to reduce overall tax burden/liability both for them and for us.

There have been questions around how to utilize and take advantage of the $14k gift exclusion as well as the lifetime gift exclusion, of which the latter I'm not as privy to.

One suggestion that has vaguely come up is to form an LLC. I've told my dad to speak with his CPA and estate attorney but I think he's shooting them very specific/cherry-picked questions rather than describing his overall intention.

Anyway, was looking for some general direction here. They own a couple properties up in Northern California and have talked about gifting them to us so we can either continue renting them out (except they're in a not-so-great situation where they're renting WAY below market rents in an area that's strictly rent-controlled). The third property they own is actually the one my family and I reside in and is currently a TIC property where I have about 25% ownership and they have 75%. We were initially talking about them having us buy out their portion by taking a private loan from the trust, etc. Oh and yes, on that note they do have a revocable trust setup.

Any pointers on which way to go from here? I know there's probably not quite enough info but I'm not looking for a full-fledged plan - I realize the CPA and lawyer would be best utilized for that anyway.

So just something to consider. Parents can pass on the property tax basis to their kids in CA, which is pretty amazing considering how aggressive CA is with taxation.

There are many hurdles and "gotchas" during this process so I would consider hiring it out. If you don't do it correctly it triggers a FMV appraisal and reassessment based on that FMV.

An experienced attorney & CPA are worth so much during this transaction.

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