Would you rather have rental losses now or a step-up in basis later?

Question

I had a client reach out to me regarding a ranch owned by his 86-year old father. His father's income is very low so he doesn't need the rental losses. The client will receive the ranch once the father passes.

I explained to the client that if the father transfers the ranch to him now, then his tax basis of $500k he paid back 30 years ago would carry over to him with the property. However, if he receives the ranch upon bequest the tax basis becomes the FMV on DOD. Then we looked into whether he could even take the rental losses against other passive income or other means. At the end of the day, it was pretty clear which route the client should take.

Without having an advisor to bounce this idea off of this could have cost his father's legacy hundreds of thousands of dollars in taxes.

However, this may be different for someone else's situation. What if this client could take the losses this year? It may have been better for him to transfer the ranch now. Or maybe there was a way to transfer only half now and half later.

Real estate tax isn't a one-size-fits-all for everyone. So what would you rather have: rental losses now or a step-up in basis later? What other factors matter to you?

Jake Latimer · Answer

Good framing. One more trap worth adding for families looking at the "gift it now" route: if Dad deeds the ranch to the kids but keeps living on it or keeps the rental income, §2036 can pull it back into his estate anyway. At that point you've done the paperwork without getting the clean result you planned for. The regs treat retained use, possession, or income as a retained interest. So the real choice is a true gift now with carryover basis under §1015, or holding it until death and getting basis equal to fair market value under §1014. A half-gift tends to land in the middle with the worst of both unless it's carefully set up. For a family business or ranch, this decision belongs inside a written succession plan alongside the will, not on its own. General info, not advice for any family's situation.

— Jake Latimer, Blueprint Advisors, The Woodlands/Houston

Dominick Austria · Answer

Agree with everything you said. I included the 50% transfer option as a way to say, there is more than 1 solution to the issue. I believe as tax advisors we should aim to list out all of the probable solutions to a client and then give them enough information/modeling to make an educated decision for their future.

Another thing I love about receiving it as a bequest is the tax basis becomes easier to calculate. It's very hard to get historical data for tax basis on a property that old, especially once the owner has passed away.

Chea Romine · Answer

For an 86-year-old owner with low income and a kid who will inherit, Id usually lean hard toward keeping the property in the fathers estate for the step-up. Carryover basis on a long-held ranch can turn a quiet transfer into a six-figure tax problem for the next generation.

The flip side only wins when the current owner can actually use the losses this year. Low AGI often means the rental loss sits unused, or it just eats a tiny tax bill while you give up a future FMV basis. Passive activity rules, at-risk, and whether anyone else on the return has passive income all matter more than the brochure "take the loss now" pitch.

Half-now / half-later sounds neat on a whiteboard. In practice you still need clean title, gift-tax reporting, and a basis allocation that will survive a later sale or audit. Id model both paths with the same FMV, same debt, and the same "who pays the tax on exit" assumption before anyone signs a deed.

Not advice for that family or yours. Just the frame Id want on the napkin.

Would you rather have rental losses now or a step-up in basis later?

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