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What is the best way to hold mortgaged real estate to save

Customer Question
on capital gains tax in...
What is the best way to hold mortgaged real estate to save on capital gains tax in the future? I own a rental that is producing income and there is a mortgage on it. As of now there is close to zero equity in it. However, I plan to keep this rental for long time, and maybe pass it to my children. When the rental appreciates, I want my children to pay minimum in inheritance taxes, and should they sell it, the minimum capital gains tax. What would be the optimal way to approach this? Trust, FLP, offshore entity? The main point is that since now it has close to zero equity, I can easily gift, transfer, etc without gift tax.
Submitted: 5 years ago.Category: Tax
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Answered in 12 minutes by:
12/2/2011
Tax Professional: William Ellis, CPA, CPA replied 5 years ago
William Ellis, CPA
Category: Tax
Satisfied Customers: 296
Experience: Over 15 years of experience in public accounting
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William Ellis, CPA :

Good morning and thank you for continuing to use Just Answer. You can transfer the property today through gifts, either at one time or over a period of years. As the laws read today, you can transfer the entire property at one time to one person and probably not pay gift tax. One is not required to pay gift tax until they have made over $5 million in taxable gifts over their lifetime.

Customer:

But if they sell it later, they would pay full tax on the gain?

William Ellis, CPA :

If this property is going to several family members and is expected to appreciate, you could look into the FLP. I wouldn't advise this unless the property's value is in the millions. One never knows what the future holds regarding estate tax, so I advise you to enact the strategy soon.

William Ellis, CPA :

They may. But unless the capital gains rates go back to the levels in the late 70s, their capital gain rates should be lower than the estate tax rates, if you are looking to have a taxable estate. I wouldn't be surprised if the taxable estate level is moved back to $1 million over the next five years.

William Ellis, CPA :

But, if the estate is liquid and can pay the tax, the inheritors will receive the property at its fair market value at the time of death.

Customer:

I would rather not risk it with estate tax. I don't like the uncertainty. I would rather transfer property beforehand via the trust. How is a living trust taxed? If I transfer property to it now, and the children are beneficiaries, what happens at the time of death? I understand that the trust property does not become part of estate

William Ellis, CPA :

Unless the rules have changed, gifts made within three years of death are included in the estate. I am not sure about donations to living trusts. I am pretty sure this does not apply to FLPs. Is direct gifting appropriate with this property?

Customer:

Yes, direct gifting is appropriate.

Customer:

but generally, transfers to living trust are considered gifts? (I mean if not within 3 years of death)

William Ellis, CPA :

Let me do a little research and get back to you. Ten to fifteen minutes. Thanks.

William Ellis, CPA :

I think if you create an irrevocable trust, the property should not be counted in your estate. But, this is a very complex area, and I would consult with a tax/estate attorney in your state.

Customer:

Ok, thanks. Let me read up on the trust taxation and maybe speak to an attorney. I do understand that this is a complex matter.

William Ellis, CPA
Category: Tax
Satisfied Customers: 296
Experience: Over 15 years of experience in public accounting
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