Inheritance now or latter?

Question

So I've got a unique situation. I am currently living on a 10acre piece of land it is owned by my parents. They are in the process of putting everything they own into a trust. The land I live on is going to be my inheritance. So the question my parents and I have is, should they give it to me know or would it be best for tax and legal purposes to wait? I'm interested in being able to leverage equity to start investing with. But is that a good move? We have a meeting with a CPA and lawyer next week. Thanks for your thoughts and input.

Ian Walsh · Answer

Leveraging the land to make money in real estate on it would not be something I would have done when getting into real estate. You can make it with out that resource and should be able to before deciding to tap into a resource like that. Most likely by the time you understand and find success in this business, you probably won't use the land anyways.

David Krulac · Answer

@Joe B.The "stepped up basis" is a provision of the IRS code. If you get a property via inheritance, then your basis as the heir is the value on the date of death. Then if you sell soon thereafter, you probably will have little or zero capital gains tax to pay. for most people the Federal long term capital gains rate is 20%.If on the other hand you receive the property as a gift from parents, or anybody else, prior to their death, then your basis is the same basis as the giver. Say your parent bought the property 30 years ago and paid $100,000. Today the property is worth $1,000,000. you get it as a gift your basis is now $100,000 also. You sell now for $1,000,000, you have a $900,000 long term capital gain which will cost you $180,000 in Federal taxes. The first way no taxes, the second way $180,000, your choice. For most people the first way is the way to go. Your individual circumstance may require some other action, and you should consult with your CPA or tax advisor before doing anything. I am neither an accountant or an attorney and am not giving financial or legal advise. see your professional.

Joe B. · Answer

Will Barnard thanks for the input. I know I'm going to get different strategies from different planners, that's why I thought it may be good to throw it out on this forum. I like the feed back those far, and it's creating a good list to bring to my meeting later this week.

Dan Mahoney · Answer

@Joe B. You should listen to the advice of your CPA and lawyer.With the caveat that I am neither, based on the limited information you provided, it may be better for you to inherit the property when one of your parents dies. This is because your basis in the property will be "stepped up" to fair market value. If they gift it to you now, their basis will carry over to you (and if they bought the property a long time go, their basis could be really low). This only matters if you someday sell the property (because you may owe taxes on the "gain," i.e., sale price minus basis). If you are going to own it until you die, your basis doesn't matter and you might as well have them gift it to you now.If your parents are wealthy or the property is worth more than $5 million, then the trade-offs are more complicated due to estate tax and gift tax considerations.

Joe B. · Answer

Ian Walsh thanks for the input. I've been back and forth about it.

Joe B. · Answer

David Krulac , thank you so much.

Joe B. · Answer

David Faulkner , I definitely do not mind getting creative and outside the box. Especially if I can create a win-win for me and my parents.

Joe B. · Answer

David Krulac , or anyone else. could you explain to me he "stepped up basis". I've heard the term used a lot when it comes to estate planning, but maybe I don't grasp it as well as I thought I did.

David Faulkner · Answer

If you get outside of the box a bit and both your parents and you are comfortable with it, then you may be able to still arrange such a thing without inheriting now ... for example, you could "manage it" for them rather than "inherit it" from them, and may even be able to have them pay you a reasonable management fee for that (double check) ... then in the end inherit all you've managed with the stepped up basis on an expanded and improved portfolio (assuming you did a good job managing). Perhaps there could also be a way to partner with them so you kick in some investment funds now and inherit later to end up with 100% of the company (double check please). You could brainstorm with your CPA and lawyer to see if/how this could be structured properly. Or just KISS and wait to inherit as others have suggested and I'd probably personally do.

David Krulac · Answer

@Joe B.DON'T do it now you lose the "stepped up basis".And tax laws may change, so always run the proposed action by your CPA.