All Forum Posts by: Katie L.

@Jennifer Scheid I know the names of a couple folks in LA or San Diego if you're willing to go that far south.

@Craig Tomlinson

You've raised a lot of issues in one post and I don't have all the facts here so don't take any of this as advice.  I wish I could see what other assets grandma had and how her estate plan was structured to know all your options.

Is the home in California? Was it in a trust, an LLC, or just held in the grandmother's name at the time of her passing? Could change the analysis. Is the brother who was on deed still alive and will keep his share of the property? So that it will be split between the decedent's brother, husband, and son in some portions? Was it held with grandma's brother in joint tenancy, in which case grandma's share might have automatically passed to her brother?

Also want to point out from the start that the newest tax laws changed the 121 exclusion to be 5 of last 8 years, not 2 of the last 5 now.

Here are some major considerations that I don't know if you've thought about though and those are capital gains taxes and property taxes. Without getting into too much detail, the rule is sort of like this: when you sell property, you take the money you sell it for and subtract your basis to get a net gain (or loss). Your basis though, has a major difference between whether you are gifted the property or whether you inherit the property. You didn't give details about when the grandma bought the house or how much its worth, but if they bought the property a long time ago for a low price, then they have a low basis. If they gift the property, the recipient takes a "carry over" basis meaning they also get the parents' basis. If, however, the kids inherit the property, they take a "stepped up" basis or "step up in basis" and their basis becomes the fair market value on the date of death. So.... say, an owner bought the property 15 years ago for $200k. It's worth $400k now. They die 5 years from now and it's worth $600k. You sell the property another 5 years after that for $800k. If they GIFT the property, you get their basis of $200k, so you will pay capital gains on $600k (800-200). If you INHERIT the property, you get a basis as of the fair market value as of the date of their death and you pay capital gains on $200k (800-600). Could potentially be a huge difference there that you want to consider. If you do not plan to keep the property in your family, could possibly be no gain if you sell it for its fair market value (worth 600k when they die, take a stepped up basis of 600k, sell it soon after death for FMV of 600k, equals no gain).

I raise this because perhaps the son would prefer to inherit the house from his father and get a stepped up basis to FMV as of grandpa's date of death rather than selling the house in which case the buyer may have a lower basis. Depends on the estate plan of grandma and who she left the property to and how it was held and whatnot. if grandma died recently, then maybe grandpa and son got a stepped up basis and capital gains taxes won't be too bad. Without seeing the plans, I cannot say.

The other major consideration sort of relates to the basis issue is with property taxes. This may be more specific to San Diego/California law, but if the parents bought the property a long time ago for a low dollar amount, it likely is assessed at a relatively low value in comparison to its actual fair market value. Once the property goes through a change of ownership such as placing it into an LLC if the owners are different or inheriting it or gifting it, the property could potentially be reassessed to current fair market value, and property taxes will be based on that new, probably higher, value of the property. Can maybe use a parent-child exclusion but I believe this option would be lost if the property is in an LLC. A parent-child exclusion stops the property from being reassessed if the transfer is from a parent to child but I think this cannot be done if the property is in an LLC since at death the child would receive an LLC interest and not the property itself, since the LLC is the owner of the property. So.... if they bought the house only a few years ago, then maybe not a big deal, but if they bought it a long time ago and it has a low assessed value, this could mean major dollars in terms of property taxes every year, which is often overlooked. So how you structure the transaction could change for property taxes which can mean big dollars. If everyone who has an interest in the property is selling it, then fine, no one is left to pay property taxes on it, but if anyone is keeping an interest, something you might want to think about.

@Dave Toelkes is right that the property may have to go through probate but sounds as if CA's probate process is much different than in his state.  Depends on whether the property was in a trust and what other assets grandma had at death and the values of them.  Did she have a trust?  A will?  Was the value of her estate under the small estate exclusion for the state in which she is subject to probate?  If her estate has to go through a formal probate proceeding, you may have to wait a longer period of time before distributing her assets to leave time for potential creditors to file claims and whatnot.  It's possible you can avoid probate though.

As I said, you've raised a ton of issues in one short post.  Let me know if you have more questions, I'm based in San Diego.

*None of this post is intended to be legal or professional advice and is not to be used as such.  Readers are directed to consult professional advice.  This post is not intended to create an Attorney-Client or CPA-Client relationship.

@Steven Straughn

You've raised a number of issues in your one short post.  I don't know all the facts so I will refrain from giving any advice but will mention a couple of things.  Do not take any of the following as legal advice and consult an attorney or other professional.

In California, an LLC will be subject to an $800 minimum tax, just for existing. The income from it will pass through and be picked up on the owners' individual income tax returns. It will be taxed at ordinary rates unless any of the owners qualify for the brand new 20% pass through rates which are rather complex. So the benefits to the LLC I could see are liability protection of course, multiple owners, and possible income tax advantages depending on the rate arbitrage of the owners.

You could put it in a trust but then the question becomes what kind of trust to create. The most common is probably your standard grantor/family/living trust. If your in-laws don't have an estate plan, they will likely want to create an estate plan if only for the sole reason of avoiding probate, which in CA can be a very expensive and long hassle, even if all parties get along amicably. Maybe their estate is under the threshold requiring probate, but if they continue to hold the property not in an LLC or other entity, they will likely want to create a family trust. Again, I don't know their circumstances so I will not give advice but suffice to say this is probably something you will want to look into. In the very least they should have wills (and probably health care directives, HIPAA documents, powers of attorney, etc.).

You can also create a trust that is a separate taxpaying entity such as a QPRT or gift trust. This might make good sense if the 3 kids plan to continue to operate the property as a rental after the in-laws die because a trust can have multiple owners and the trust document can govern various ownership percentages and rules for management and partitioning the property, etc. One of the downsides is that trusts hit the highest tax brackets rather quickly so if this property is producing profits, could be subject to tax at higher rates faster than if you created an LLC. The family trust if it is a grantor trust will be subject to tax on an individual income tax return at normal rates, not the accelerated trust rates. The higher trust tax rates are for separate tax-paying trusts which are usually irrevocable trusts.

You'll want to be cognizant in all of these options of the gift tax consequences of how the parents transfer ownership and when they do so.  Sounds like the in-laws aren't entirely wealthy that they may not owe actual gift tax but they could create a filing obligation.  You can also consider a sale to the daughters.

There are two other major considerations that I don't know if you've thought about though and those are capital gains taxes and property taxes. Without getting into too much detail, the rule is sort of like this: when you sell property, you take the money you sell it for and subtract your basis to get a net gain (or loss). Your basis though, has a major difference between whether you are gifted the property or whether you inherit the property. You didn't give details about when the parents bought the house or how much its worth, but if they bought the property a long time ago for a low price, then they have a low basis. If they gift the property, the recipient takes a "carry over" basis meaning they also get the parents' basis. If, however, the kids inherit the property, they take a "stepped up" basis or "step up in basis" and their basis becomes the fair market value on the date of death. So.... say, parents bought the property 15 years ago for $200k. It's worth $400k now. They die 5 years from now and it's worth $600k. You sell the property another 5 years after that for $800k. If they GIFT the property, you get their basis of $200k, so you will pay capital gains on $600k (800-200). If you INHERIT the property, you get a basis as of the fair market value as of the date of their death and you pay capital gains on $200k (800-600). Could potentially be a huge difference there that you want to consider. If you do not plan to keep the property in your family after the in laws die, could possibly be no gain if you sell it for its fair market value (worth 600k when they die, take a stepped up basis of 600k, sell it soon after death for FMV of 600k, equals no gain).

The other major consideration sort of relates to the basis issue is with property taxes. If the parents bought the property a long time ago for a low dollar amount, it likely is assessed at a relatively low value in comparison to its actual fair market value. Once the property goes through a change of ownership such as placing it into an LLC if the owners are different or inheriting it or gifting it, the property could potentially be reassessed to current fair market value, and property taxes will be based on that new, probably higher, value of the property. Can maybe use a parent-child exclusion but I believe this option would be lost if the property is in an LLC. A parent-child exclusion stops the property from being reassessed if the transfer is from a parent to child but I think this cannot be done if the property is in an LLC since at death the child would receive an LLC interest and not the property itself, since the LLC is the owner of the property. So.... if they bought the house only a few years ago, then maybe not a big deal, but if they bought it a long time ago and it has a low assessed value, this could mean major dollars in terms of property taxes every year, which is often overlooked.

Hope that's some food for thought.  I'm sure I've missed several things but you raised a ton of issues in your one short post.  

Again, I do NOT have all the facts here so none of the above is intended to be legal or professional advice.  This post and information does not create an attorney-client or CPA-client relationship.

@Angel Clark

Should have mentioned that if you need the names of attorneys or CPAs in San Diego I can shoot you some names but my contacts don't really extend past LA.  

@Angel Clark

Without knowing all the facts here I won't give an opinion but you've raised several issues in one short post.  

estate plan: Do you have an estate plan in place at all?  A will?   Trust?  Is the value of your share of the home large enough to force you into probate in the event you died without a trust in place?

down payment: How did you structure the money from your family for the downpayment?  Is a gift tax return required?  Did you structure it as a loan such that mortgage interest can be deducted or do you consider it personal debt in which case interest payments are likely not deductible?

source of funds: did your SO contribute anything to the down payment? If not, and you give him equal ownership, you could be considered as making a gift to him if he gets a larger share of the equity than what he contributed. Joint tenancy will give him an equal 50% share whereas TIC you can take a percentage ownership ratably to what you contributed.

title: joint tenancy with rights of survivorship will likely give to your SO upon your death the full interest in the property which will then pass per HIS estate plan at his death. if you want to pass your share to your son, you may want to do TIC and then leave your share in your estate plan to your son. but as was mentioned, that means SO could sell his share or maybe mortgage it or partition for sale since he owns his percent and you own your percent. might want to consider a co-ownership agreement and likely want to talk to an attorney.

minor child: you will want to have an estate plan in place naming a guardian of the estate of your son who would manage his assets in the event you died.  if your son is also the natural child of your SO then he may have power over your son's assets but you could try naming a guardian in your documents to try to get court oversight in the event you die before your son attains the age of 18.  you could also leave your assets to him in a trust and name a trustee that you trust and lay out specific provisions about when he is to receive income and assets and at what ages.  again, would likely need to talk to an attorney.

You also may want to have an agreement in place and keep good records between you and your SO to know who deducts expenses related to the home like mortgage interest and property taxes.  if you're splitting expenses equally, it would seem you would want this to go equally, but depending on how it is titled or whose SSN things are listed under, tax documents may show otherwise.  might be good to have things in writing if you don't trust him with his finances.

one other note, california is a community property state.  you are not married so this doesn't apply here yet at least but if you do get married, you will want to consult with an attorney to ensure separate property and community property are titled accurately before entering into the marriage.

Again, I don't know all the facts here and I'm only insinuating a sort of mistrust here based on your post but don't intend to presume any sort of relationship between you and your SO.

*none of this post is intended to create an attorney-client or CPA-client relationship.  none of this post is intended to be legal or professional advice or relied upon and the recipient and any readers should consult professional advice and counsel.

@Jamie Oie

Don't have all the facts here so I'm just covering the basics, but make sure they are familiar with all things related to rental real estate - depreciation, what gets capitalized versus deducted, basis, 1031 exchanges, depreciation recapture, etc.  If you're flipping rather than holding long term, might want to think about capital gains and losses in conjunction with other assets such as if you have investments with a broker.

Also might want to be sure they're familiar with out of state filings and requirements plus the state tax credit if you're looking to invest out of state.  Also, estimated taxes depending on your situation if you earn regular W-2 wages that have withholding but will need to pay in estimates to cover any profits from your rentals.

If you anticipate losses, make sure they are familiar with passive loss rules and the exceptions to allow you to deduct the losses.

If you're talking about your parents giving you money, be sure they're familiar with gift tax laws or how to structure it to ensure you can still deduct interest payments as a mortgage rather than personal debt (you might want to get an attorney involved here).

Looks like you're also considering some nontraditional financing methods, so whatever forms you're considering, ask about the treatment of the interest and debt payments related to that.  

Not sure how much it applies here but you could ask his/her opinion about shifting property tax payments and any other itemized deductions possible to your rental properties to be able to deduct on Schedule E rather than Schedule A since you're in a high tax state of California, though not sure what yours and your husband's other income and assets look like.  Taxpayers will be limited to deducting $10k in taxes on Schedule A under the new tax laws.

Also, side note but if you are looking at buying several properties you may want to look into creating an entity to limit your liability such as an LLC and possibly look into the 20% pass through tax rate with the new tax laws if that benefits you. You'll likely want to have an estate plan in place too if you don't have one already. You may very well benefit from speaking with a tax, real estate, or estate planning attorney here.

If you need names of attorneys or CPAs in San Diego let me know.  Good luck!

*None of this post is intended to create an attorney-client or CPA-client relationship.  Recipient should seek professional advice and is not to rely upon the comments in the post.

@Meldeine Sipes

You're definitely going to want to talk to an accountant or more likely an attorney to figure out the best path for you. If you're a CA resident, you may be subject to taxes in CA regardless of where you create the LLC. Nevada has no state income tax but you need to ask a professional if you will still be subject to tax depending on your situation. I beg to differ with @Account Closed that CA has weak laws. The draw to NV is normally for tax purposes as CA is very protective of its businesses (and its revenue). In either event you will want to make sure your LLC operating agreement is drafted correctly (especially in light of the brand new partnership audit rules) and ensure an LLC is even the right choice for you. You may be able to accomplish the same effect with an umbrella policy or maybe a partnership with less annual filing fees and requirements. These are really questions on an individualized basis. If you’re looking in San Diego, I can shoot you the names of some attorneys or accountants if you need. Good luck!

*none of this post is intended to create an attorney-client or CPA-client relationship and recipient should consult with professionals for advice 

@Alison Dickens

I can give you the names of some CPAs in San Diego if you would like to call them. Send me a PM.

@Jason Langmo

Hi Jason, welcome to BP!  Unfortunately, the inheritance tax is levied on the value of the decedent's estate at the time of death.  So if the decedent held the ranch at the moment of death, it is included in his/her estate, and will be subject to the estate tax.  The statutory rate for estate tax in 2017 was 40%.  This is a tax that is levied on wealth, not a transfer, and not on earnings, but on the net wealth a person held at death.  So if the decedent had other assets besides the ranch, all the assets get added up together for a total value of the decedent's estate, which is then subject to estate tax.  In 2017, a decedent could either die with or gift during life a combined $5.49 million dollars before being subject to transfer taxes.  Without knowing the full facts here, I cannot say how much tax your co-workers' in-laws will owe, but basically it would be a calculation to the effect of this: add up the decedent's full value of assets owned at death, add up any prior gifts made during the decedent's lifetime that exceeded the annual exclusion, and subtract out $5.49 million.  The remaining value will be subject to 40% taxes.  

Now there are ways to reduce estate tax with proper planning before death.  After death, you are limited to the deductions that you can take on an estate tax return, which the in-laws may want to look into depending on how close they are to being under the $5.49m limitation.  Things like funeral costs, final medical expenses, attorneys and accountants fees, debts of the decedent, etc. can sometimes be deducted on the estate tax return.  Sometimes these deductions can be taken on either the final 1040 or the 1041 OR the estate tax return so the in-laws will want to work with a good CPA or attorney to plan accordingly.

You also may want to talk with an attorney in order to see if the ranch can possibly be excluded from the decedent's estate depending on how title was held. Perhaps it was held in joint tenancy or in an IRA or some other form which allows the asset to pass outside the decedent's estate. But, if the decedent held it outright at death, there is no escaping the tax through sale or 1031 or some alternate path if the estate is in fact subject to tax.

I am not sure also as to the date of death of the decedent but the in-laws will want to look closely at due dates for the estate tax return, filing for an extension, and having enough liquid funds on hand to pay the tax.  There are penalties for not paying in enough tax timely, and interest begins accruing from the date the tax return was due without regard to extensions.

*None of the above information is intended to be professional advice to be relied upon by the reader.  It is not intended to create an attorney-client relationship or CPA-client relationship.  Please consult with your attorney or tax advisor.

@Jorge Barboza Jr.

Ditto what most of the others have said. You may want to talk to an attorney about asset protection or a financial planner and get yourself an estate plan if you do not have one already. If it's a single member LLC it will likely be a disregarded entity for federal purposes (so not really changing your federal taxes when compared to holding property in your individual name) but you may have higher costs at the state level. If you have a net profit in the LLC there is a sliding scale of fees you pay to the state, with the minimum being $800 as @Basit Siddiqi and @Lance Lvovsky pointed out, plus the costs of preparing a return and also picking up a K-1 on your own individual return.

Couple other things you may want to think about are making estimated payments based on your real estate income to avoid underpayment penalties if you aren't doing that already and depending on how much profit/loss your real estate is yielding. Also depends if you have a W-2 job that is withholding for you and at what rates, etc. The CA LLC has odd dates for when the annual fees are due, so if you have already created an LLC you may want to look into those dates and stay on top of the payments. Also not sure who drafted your LLC agreements and such but you may want pay attention to the language in your agreements to hold meetings and keep minutes as instructed in your LLC operating agreement.

@Shayne Cocotis There are several different entities in which you can hold real estate, all with their different positives and negatives.  Depends how many owners, the value of the property, the shape of the property, your other assets, your risk tolerance, what kind of tenants you have, your tax situation, etc.  You can consider LLCs, partnerships, S-corps, trusts, etc.  You probably want to talk to an attorney based on your own particular circumstances.  In the very least you will probably want a revocable trust and a solid estate plan in place if you do not decide to create an entity for your real estate.

I know names of attorneys and CPAs in San Diego if that interests either of you.  Send me a PM if you do.

*None of this post is intended to be legal or professional advice nor to create an attorney-client relationship.