Legal/Tax Suggestions for Seller wanting to preserve step-up tax shield benefit

[Dan Becker]

Hi All,

I am looking for deal structure suggestions on a unique situation that involves a home held in trust.

I have a seller who owns and rents out an SFR that has an FMV of $~2M. He and his wife hold it in a revocable trust with plans for the asset to be distributed to his adult children. The property is in California, so the children will get the benefits of a locked-in property tax assessment value that is at least half of similar properties ($27k), and when the children do sell, they will get a step-up in cost basis for ~$1.6M on the eventual sale. Assuming a 30% tax on the gain, I am ballparking that benefit to be a $480k tax shield for the children.

However, the owners would prefer to sell now.  Primarily because home prices in the area are expected to flatline / deflate/ correct,  but also because the property was built in the 50s and more serious deferred repairs and maintenance are starting to compound.  It is becoming a lot for the 80-year-old owners who are expecting greater costs in time and dollar (self managed).

Is there any creative deal structure that can be used so that I can buy and occupy the home including the assumed improvements, repairs and maintenance, while allowing the seller to preserve the step-up tax shield for their descendants?  The other constraint, the seller is not interested in a 1031 exchange if it means owning/managing another property.

So far, the only concept I can think of is something like a contingent title transfer upon closing.   I'm not sure if there is such a deal structure or even the risks involved if engineered,  but the idea would be that the title doesn't really transfer / and a final balloon payment isn't made until after the property actually transfers to the children.   

Is this a feasible concept, are there other concepts to consider?

All thoughts welcome, and thank you!

--DB

[Benjamin Weinhart]

Hi Dan,

Great question! Since the trust is revocable in this case, I feel that it's more or less irrelevant for the situation as all items would get treated similarly. I have seen it before with a few of my clients that they were able to utilize a Sec. 721/1031 transfer to move the assets into a REIT or other similar activity depending on the type of business. This would be a conversation to have with a qualified intermediary. Since the trust is revocable, the basis would still be stepped up on the date of death of the last grantor of the trust. This is just one of the items available to them, there's a few other avenues to take but thought I'd mention the most common I've seen.