TAXES When you pass down your rental properties to your kids?

5 Replies

Hello,

Just wanted to know if you guys might be able to clear some things up for me.

When u pass down rental properties to your kids when u pass away, what kind of tax are they required to pay if they decide to keep it as a rental property? Any way to structure the deal so they don't have to pay any taxes if they don't sell and just keep it as a rental property?

Thanks

Chue

one of the biggest tax advantages of real estate is the fact that when you die your kis get stepped up basis.  A huge mistake sometimes people make is they gift their properties to their kids right before they die to try and avoid probate. This means they get carryover basis.  

Stepped up basis means they get the property at the fair market value on the date of your death so if they sell it so no tax but if they keep it they get to start depreciation at the fair market value less the land value for the next 27 1/2 years

Carryover basis means they get the property at whatever your basis is at the time of transfer

Hope this helps good luck

The person who inherits does not pay any federal inheritance tax.  If any federal inheritance tax is due, it is paid by the deceased's estate.  Most states follow the federal rule, although there are a few states that do charge the recipient a tax on an inheritance.  

Cameron addressed capital gains impact on the heirs if the inherited property is eventually sold.  If the inherited property is never sold, then no capital gains to tax.

The Living Trust is a specific vehicle specifically intended to address this issue.

A) the Trust must predate the demise of all property owners of record

B) the property must then be VESTED into the Trust (using a quitclam deed)

contact a Trust lawyer for the details.

Your question has been well answered. As long as the value of the estate is under the statutory exemption limit (about 5.5M for a single person and 11M for a married couple), then the estate passes tax free upon death, and as said with the step up in basis.

Whether the property is held in a trust or not will not make a difference as to the tax liability. A trust will, however, facilitate the ownership transfer by avoiding probate, which depending on the state you're in, the value of the estate and a few other things can be a short or very long process and expensive. So, making sure the property is in the trust can make for an immediate transfer upon the death of the owner to the beneficiary. And a trust can be much cheaper to set up than probate as well. Anyone with real estate holdings or businesses, should have an estate plan with a  trust established.

Happy investing!

Jeff