What happens to your RE portfolio when you pass away?

[Melanie Baldridge]

Do your heirs pay significant taxes?

This is a common question among real estate owners.

Let's dive in:

The reality is that wealthy families often pass on real estate assets from generation to generation.

For example, if one generation has an RE entrepreneur who amasses $50 million worth of real estate, that portfolio can generate enough cash flow to support multiple future generations comfortably when passed on.

So, what happens if that initial investor built their empire by rapidly depreciating assets and using 1031 exchanges to lower the basis and defer taxes along the way?

Do these tax advantages disappear when the original owner passes away and hands the portfolio to their children?

The answer is no, they do not!

The current tax code provides special benefits in this situation.

When the original owner passes away, the "basis" of the assets resets to the market value at the date of death.

In the US, there is currently an estate tax exemption of approximately $13 million per person, which allows the basis to reset, and depreciation can start anew.

This “step-up in basis” is particularly useful if the next generation wants to sell the asset.

Since their basis is set at market value, if the property is sold at that value either at the date of death or within six months, there is no capital gain and no taxable event.

There have been many examples where portfolios of fully depreciated real estate worth tens of millions of dollars have been passed down from one generation to the next, resulting in little to no tax liabilities for their heirs.

Pretty cool, right?

As always, tax laws in the US are subject to change so it's always best to consult with a tax pro or estate planner for the most current and personalized advice.