LLCs and possibly losing step up basis

[Becca F.]

I know this is the millionth post about LLCs. I've talked to two investors in California and they said if a property is in an LLC, your heirs (my kids) would lose the step up basis. For example: if I bought a house in California for $500,000 and at the time of my death it's worth $1.5 million. Kids decide they don't want to continue renting it out and sell it and current market value is $3 million. I could also use lesser amounts on my Midwest properties, same concept, purchase price $120,000 and it's worth $300,000 at the time of my death. Kids want to sell it in the future and it's worth $500,000.

The step up basis is they subtract the sale price of $3 million and $1.5 million so proceeds are $1.5 million and they pay capital gains tax on that amount. My layperson knowledge of this is if they lose the step up basis it's $3 million minus my original purchase price of $500,000 so now they pay capital gains tax on $2.5 million. 

If I had my properties in a Wyoming LLC for anonymity and the property can't be traced back to me as the parent, aren't my kids inheriting this property through a business, the LLC (losing the parent-child transfer)?

[Jerry W.]

@Becca F., you REALLY need to talk to a CPA about this, not an attorney unless they do tax law.  I am not an expert, but if a property has appreciated $2.5 Million, I WOULD NOT gift it to my children.  If an attorney recommended to them to do that I would file a grievance against him for incompetence.

When you gift a property during your lifetime the basis of the gift to your children is what you paid for it. If you die and they inherit it from your estate, a trust, or most forms of an LLC they get a free stepped up basis. Free stepped up basis is entirely different from inheritance tax, which is set at over $11 Million currently, but is likely to drop to $5 Million is 2025 with a 40% tax for amounts over that amount. The rationale behind the free stepped up basis is that it is not fair to pay a 40% tax on capital gains and a 40% inheritance tax. The Biden administration had tried to do away with the free stepped up basis but it gained no traction. We lost a lot of family farms and businesses in the 1970s and 80s because of inheritance taxes starting at $125K and being at 30% and going up to 70%. The outcry from that led to many of the changes we are enjoying today.

TALK TO YOUR CPA.  Do not put long term holds into Sub S elected LLCs or corporations.  Those do NOT get the stepped up basis.  Actually corporations do not get a free stepped up basis, only the stock would if you sold the stock.