Change my mind. "APARTMENTS SHOULD BE HANDED DOWN VIA YOUR WILL"

7 Replies

What's the best way to divest an apartment asset for an older owner who wants the best for their family is Option #1

1) hand down asset to children via a will

Other options:

2) Sell outright and pay taxes

3) Exchange into a 1031 fund (Merrill Lynch has a 1031 exchangeable index fund starting at $500k I believe)

4) Contract for deed, pay recapture now and taxes gradually (maybe 2nd best option).

"wants the best for their family" is vague.  Define "best" in a way that everyone would agree on.  *wink.  Since that's impossible...

You need to talk with the older owner and find out what he/she wants.  Money now?  Money later?  Income for life and beyond?  Lower taxes?  Higher sale price?  Stepped up basis?  

Don't be surprised if once the owner dies, what the family decides is "best" might be re-interpreted.  Death and money (and assets) do strange things to people.

As the others alluded to- there are many factors. 

1. What does the current owner want out of this? 

2. Is the current owner's estate going to be taxable? 

3. Does the current owner have the cash to pay taxes? 

4. Does the current owner need current cash or an income stream? 

Lots of options depending on what they want to accomplish, and the estate tax must be thought about if the investor may be taxable.

MICHAEL SKOCZYLAS; Thanks for your reply!

-How does one determine if the estate is taxable?

-If an owner sold a building, wouldn't they have the cash to pay any taxes?

Originally posted by @Justin Hennig :

MICHAEL SKOCZYLAS; Thanks for your reply!

-How does one determine if the estate is taxable?

-If an owner sold a building, wouldn't they have the cash to pay any taxes?

 1. As far as the estate tax - the current exemption amount is $11.4 million per person. If the individual is close to that amount (and sometimes its a guessing game) then they should be aware and start the planning process. 

2. As far as having the cash - sometimes they leveraged it, pulled it out, and spent it elsewhere, and when they sell- the proceeds may not cover the tax expense. While that is rare- it could happen, particularly with recapture. 

Thanks for starting this conversation! 

@Justin Hennig currently I am leaning towards selling with seller finance if and when I am ready and wanting to do that. The properties are paid for so anything is doable. My accountant will help. One of my 4 kids may want to become a LL; so that is another option. 

Originally posted by @Justin Hennig :

What's the best way to divest an apartment asset for an older owner who wants the best for their family is Option #1

1) hand down asset to children via a will

Other options:

2) Sell outright and pay taxes

3) Exchange into a 1031 fund (Merrill Lynch has a 1031 exchangeable index fund starting at $500k I believe)

4) Contract for deed, pay recapture now and taxes gradually (maybe 2nd best option).

1...Modified!

  IF any of the heirs want to manage the asset, or manage the PM for the asset, it may make sense to pass the asset down to the heir...BUT never pass property through a will.  That is plain stupid and only results in months of probate time wasted and the cost of probate attorney/judge/court cost depending on where you live, for example LA County, CA it could be FIVE YEARS before probate cases including real estate is finished.  Why put the heirs through that?  Deed the property to pass on to the heir, if that type of property deed is allowed in that state or put the property in a Trust to avoid probate. 

Before passing on the asset to heirs, one should also determine of he/she is ok with passing it on to the heir(s) who may desire managing the asset and leaving out other heir(s) i.e. is there enough to also give what he/she wants to the other heirs?  Are the other heirs ok with receiving $ over time through a split of the rent?  What is the exit strategy for all the heirs?

If none of the heirs are interested then a Trust could avoid probate hassle and cost and the Trust could say to sell the property upon the Trustor's death.  Also, if the Trust taxes are paid through the personal taxes of the Trustor, then upon the death of the Trustor the value of the asset is reset at market value on the day of the death, and can be sold with an actual LOSS, due to the closing costs, giving all the heirs the split $ from the sale and a split of the capitol gains loss which they can then use on their personal taxes.

Trusts are great for property transfer!  And avoiding capitol gains taxes!