What happens to your RE portfolio when you pass away?

[Melanie Baldridge]

What happens to your RE portfolio when you pass away?

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.

[Austin Cheatham]

Quote from @Kevin S.:

@Melanie Baldridge

And what happens if not sold in six months?

You still get the step up in basis even if it is not sold. The FMV at date of death is your new basis. What Melanie is referring to here is stepped up basis rules that allow you to take the FMV at date of death or at 6 months after death. Whichever you select must apply to all assets in the estate.

But you still get the new basis at time of death, regardless if it is sold within 6 months. To illustrate:
You inherit a property today that your relative/friend bought 10 years ago for 100k. It has a fair market value of 500k when you inherit it. You then sell that property 2 years later for 600k. Instead of recognizing the gain of 600k - 100k, you get a stepped up basis at time of death. So your gain would be 600k - 500k.