Taxes on Capital Gains, special case

2 Replies

Hello BPers!

The deal:

1. You have a paid off mortgage on an investment property intended to be an inhertance.

2. There are 2 family members on the deed.

3. One family member is retired and shows less than 35000 per year of income. The other family member (the inheritor) shows a significant 6 figure income.

Question 1: (only BP geniuses dare reply:)

What do you recommend in regards to structuring the disbursement of funds. To what accounts and in whose name, etc etc. And why????

The funds are going to be used to purchase more real estate, where the retiree will get a % on the total sum yearly, and the working member can leverage as he sees fit.

Let's start with that. Bring it BF!

@David Miller

I think that perhaps the answer to your question would be determined after a long conversation that takes into consideration everyone's facts, circumstances and goals (read: there's no simple, direct, easy answer here).

"What do you recommend in regards to structuring the disbursement of funds. To what accounts and in whose name, etc etc. And why????"

You'll need to clarify what you mean here.  Are we talking about normal withdraws from the business account or disbursement of sales proceeds?

You generally will not be taxed on non-liquidating distributions as long as the rental real estate is not held by a C Corp. Distributions from an LLC or partnership should follow the operating/partnership agreement...perhaps that's the easy and fast answer...

Originally posted by @David Miller :

Hello BPers!

The deal:

1. You have a paid off mortgage on an investment property intended to be an inhertance.

2. There are 2 family members on the deed.

3. One family member is retired and shows less than 35000 per year of income. The other family member (the inheritor) shows a significant 6 figure income.

Question 1: (only BP geniuses dare reply:)

What do you recommend in regards to structuring the disbursement of funds. To what accounts and in whose name, etc etc. And why????

The funds are going to be used to purchase more real estate, where the retiree will get a % on the total sum yearly, and the working member can leverage as he sees fit.

Let's start with that. Bring it BF!

If the two family members are already in the deed, I don't think the full property will be inherited with the steped-up basis. I am not sure if the step-up basis was your intention here. Basically, when you inherit the property, the basis in the property gets stepped up thus basically wiping out any appreciation that would drive the tax liability if you were intending to sell it right after the inheritance. 

The portion of the property that is not owned by the two family member you mentioned will be inherited with a step-up basis.

Thus if your distribution was regarding the step-up basis portion, there will be no tax liability to the heir.  Also, the will or the titling determines the distribution of the inherited fund, you can manipulate it after it has been set in the documents unless changed. 

These need to be to sort out with the family member to see if they agree on who inherits the house first and gifts the agreed-upon money if any tax liability is as expected as two family members are already in the deed and there will be no step-up  on portion that is already owned by the two family member and the appreciation on that portion will be taxable when sold. 

If 0 tax liability is intended, it is advisable that the entire property is gifted to the family member who is going to pass the property later on. 

This needs to be discussed with the professional as there is timeline restriction.