Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Hello,
We are in talks to buy a portfolio of rentals from an individual who's spouse recently passed away. They are considering doing owner financing and we have been talking about possible benefits or drawback for each of us. I am wondering how accurate their tax person's advice is, since they are NOT a CPA and do not specialize in real estate taxes.
Some of the parameters;
Portfolio worth about 1.25M
Cost Basis about 750K
Have taken about 250K in depreciation
All properties are paid off
Community property state
They are under the impression that both their capital gain of 500K and depreciation taken of 250K will NOT be taxed (make sense to me) and that ALSO their new basis will be 'stepped up' to the current market value of 1.25M. It is the part about the depreciation recapture being stepped up that seems odd to me. I thought there was basically no way of getting out of that? If the surviving spouse held the portfolio until their death, would that also apply to the heirs that would inherit it?
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
10y
I am NO cpa so this is just my opinion.
I'd be surprised if the spouse doesn't have to pay taxes on the gain. I thought that the death of a spouse is not an inheritance event where x amount of the inheritance is passed with no taxes.
So if the spouse had inherited 20 million dollars of property, she would pay no tax on the inheritance but all the tax consequences built up over the years would still be attached to the properties.
I can clearly be wrong but that would be more logical. I don't think I have ever heard of a spouse getting a ton of money from the death of their spouse and then having to pay a bunch of taxes on it.
I think the inheritance laws only apply to inheritance by non-spouses (i.e. kids, family etc) where they can get a certain amount of inheritance shielded from taxes and the rest is taxed.
So in that case, maybe had the kids inherited these buildings, then I could see where they may avoid any capital gains on the profit or depreciation. But I'm having a hard time understanding how the spouse can avoid any capital gains on the profit or depreciation. Those all move along with the property when they go to her as I believe an inheritance by a spouse is a non-taxable event in terms of change in ownership.
But I have zero basis to say that on. Just seems odd to me that it would be so. :-)
Talbott, TN · Member since 2016 · 5 posts · 1 vote
10y
It depends on whether the home is considered community property or not. If the home is not community property, then the step up in basis is only on the deceased spouse's half of the property. Under certain circumstances in community property states, there is a 100% step up in basis. If that's the case, then it is possible for the seller to realize no taxable gain on the property. Since I'm in Tennessee, which is not a community property state, I'm sketchy on the details. It would probably be worth consulting a local CPA.
We are in talks to buy a portfolio of rentals from an individual who's spouse recently passed away. They are considering doing owner financing and we have been talking about possible benefits or drawback for each of us. I am wondering how accurate their tax person's advice is, since they are NOT a CPA and do not specialize in real estate taxes.
Some of the parameters;
Portfolio worth about 1.25M
Cost Basis about 750K
Have taken about 250K in depreciation
All properties are paid off
Community property state
They are under the impression that both their capital gain of 500K and depreciation taken of 250K will NOT be taxed (make sense to me) and that ALSO their new basis will be 'stepped up' to the current market value of 1.25M. It is the part about the depreciation recapture being stepped up that seems odd to me. I thought there was basically no way of getting out of that? If the surviving spouse held the portfolio until their death, would that also apply to the heirs that would inherit it?
You what state did they live in? If they were in WI which is a community property state, upon the death of the spouse they are looking at a FULL step up in basis to current FMV. (it won't be 50% is adjusted to FMV like in other states. There will be no depreciation recapture. It is treated as a new asset to the spouse however, it retains it long term capital gain status as all inherited property does.
Feel free to PM me or give me a call and I can explain further.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
10y
To clarify, these are rental properties, not his principal residence. All of the properties are held in a revocable trust that is in both of their names (meaning both the deceased spouse and living spouse). All of the properties are WI and they also are in WI.