In today’s Living Akamai Segment, Kay Mukaigawa of Engel and Volkers discussed the idea of parents and the decision to pass the title of their property to their kids and the significant tax implications it could have.
“Yes, it is. When you own property, you want to be able to pass this asset to your children. As part of legacy planning, we sometimes see children being deeded on to title, while their parents are still alive. While this may have some benefit for estate planning, it could be very costly, should the children decide to sell the property.”
Kay also told us a very helpful story.
“My friend Brenda’s parents were advised to take themselves OFF title on their investment property, and deed the house to Brenda and her brother Tony. After a few years, they decided they no longer wanted to be “partners” on this rental property, and decided to sell. And here’s where it got expensive. When we sold their investment property at $1M, the starting point when calculating profit, which we call the “cost basis”, was their parents original 1976 purchase price of $100K.
So, sold for $1M minus the $100K original cost equals $900K in profit. Even after deducting expenses and improvements, they paid over $200K dollars in capital gains taxes. Two things to consider: One – If their parents had kept the property in their name, and Brenda & Tony had INHERITED the property upon their passing, they would have benefited from the “stepped up basis”. Stepped up basis refers to the adjustment of the original cost of an inherited property. The starting point in calculating gain, is the fair market value on the date of the parents passing, NOT their original purchase price in 1976. And here’s the 2nd thing to consider: Since Brenda and Tony were already put on title as investors while their parents were still alive, instead of simply selling the property and paying the large capital gains tax, they could perform a 1031 Tax Deferred Exchange, and transfer the gains into two separate investments. This would allow them to go their own way, and not be subject to hundreds of thousands of dollars in long term capital gains taxes. Of course, when it comes to taxes, please consult with your tax professional. We simplify want to provide you with some strategies to think about if you are in a similar situation. “
For more information on 1031 Tax deferred Exchanges you are welcome to join a seminar where Engel and Volkers will share more strategies that may help any family simplify their life. Give them a call them a call at (808) 725-2000