How do I avoid paying taxes on inherited properties

[Jessica Flint]

My parents have been working on setting up their living will. I will be inheriting their two houses but I wouldn't want to keep either as a rental. I'd probably, most likely, do a 1031 exchange with both of them. What would be the best way to inherit these properties without having to pay taxes? Would I pay taxes if I do a 1031 exchange? What if we started an LLC and all three of us were in it? When they pass, and if I were to sell outright, what kind of taxes would I pay? Suggestions on how to go about setting this up?

[Jeff Copeland]

First of all: Seek the advice of an experienced CPA, financial planner, and attorney. Their expertise will be worth every penny. 

In very general terms, if you inherit the properties, your cost basis will be the appraised value of the properties on the date of inheritance. 

So, if you inherit them with a value of $200k each, and sell them right away for $200k each, there would be no capital gains to pay taxes on. You would not need to do a 1031 Exchange in this scenario, because there would be no tax to defer. 

If you keep them for a few years and they go up in value, that could obviously change.

Putting them in an LLC or a trust is another possibility, but each may come with other tax and financial implications (see first sentence above).