Inheriting RE - taxes, ownership, advice in General

2 Replies

Although the tax reform bill is still in conference and hasn't been passed, and the final bill will require study in conjunction with a discussion with a real estate savvy CPA to understand its implications on my particular real estate question, I am hoping someone on this thread can weigh in with some general advice. Please excuse the long post.

My close friend's parents are "buy and hold" small time landlords with a 2 commercial (1 building has three units and the other is one contiguous space) and 4 residential properties they rent out. These properties are all held jointly by their parents in their parent's names only, but each property has good liability insurance and umbrella policies. 

The parents structured ownership in their name only this way partly because they were not convinced that since they handle maintenance, tenant vetting, etc themselves., that LLCs were worth setting up for each property. That there wouldn't be a huge benefit to it. With such hands on management the corporate veil protection of an LLC could be easily pierced was part of the reasoning. However, one of the residential buildings is currently held in a partnership with the parents, and their two siblings.

There are no separate bank accounts for these properties and money is just being deposited into one account., which I think needs addressing. These buildings bring in good rent, are centrally located in a major city, are well kept, and were a side business for the parents when they were working. This year they retired and are living on rental income from these properties. They've never really been strict about all the itemized deductions as landlords they could be taking (travel expenses, repairs etc.) or used spreadsheets to track things like rent. They were basically accidental landlords, who worked hard at their other professions, who were lucky to have good tenants.

These building will pass down to the sibling ( my friend) and his brother  as inheritance and will be 50/50 ownership.  They would like to continue on managing them. The siblings are trying to get up to speed on being future landlords. They've created excel spreadsheets to track expenses and rent. Encouraged separate bank accounts. Kept receipts for maintenance to itemize deductions etc., but I am curious as to some suggestions for the most tax advantageous methods they should be transferred the siblings. 

Should ownership be transferred via forming partnerships (or LLCs? or S Corps?) for the all properties currently held in name only while the parents are living or should they just wait until after their parents have passed to assume ownership (the properties are held in a revocable trust where the siblings would simply inherit them)?

In any case, once these properties are theirs solely, should they continue to be held in name only but with high insurance polices as they are now? Or in an LLC(s)? Or Series LLC? Or in an LLC elected to be taxed as an s corp? Basically what would be a tax advantageous set up?

Any tips on property management or other way for them to get up to speed on inheriting these buildings. and how they should prepare themselves, both from a management and tax perspective would be appreciated as well.

I know a CPA is going to need to wade into the nitty gritty, as this is a complex set of questions, but any general advice is appreciated. Thank you.

In general, the best way to transfer property is usually to wait until the owners are deceased.  The heirs then receive a stepped up basis of the value of the real estate as of the day of death of most recently deceased owner or a date six months in the future (the alternate valuation date).  

How to manage the property while still owned by the parents is, quite frankly, nobody's business except the parents.  Unless the parents are complaining about a high tax bill or an inability to track tenant receipts or expenditures, then things are likely working just fine for them.

The one thing I would advise is that the leases with the tenants remain in order.  That way, the heirs can quickly and easily transfer over to the business methods that work best for them in a manner that is seamless to the tenants.

An S-Corp is a horrible idea for holding property and an LLC is not necessary with an adequate umbrella policy (in my opinion. This topic can spark a religious war here on BP).

Beginning to transfer ownership of these properties to the children now via joint ownership in LLCs between the parents and children can spark Gift Tax situations.  While the parents may not owe Gift Taxes, they may have to file the returns which will then spark complicated tracking in the estate later on.  (Depending on what happens with the Estate Tax that is being debated in Congress right now).

@Aubrey P.

Linda provided you strong advice. I agree with everything she mentioned.

Question though - Why do you have such a keen interest in their situation. This is your friend's parents house and will pass down to their children.
Are you trying to buy it from the children when they inherit the property?

Basit Siddiqi, CPA
917-280-8544

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