After a lifetime of tenants, taxes, and toilets, landlords and real estate property owners find themselves in the precarious position of how to best manage their rental portfolios as they age. Faced with the prospect of declining health, many real estate investors must liquidate their assets at far below market value in order to pay for associated healthcare costs.
Other real estate investors may attempt to avoid these costs altogether by gifting the real estate to family and loved ones without realizing the tax time bomb created for the beneficiary. For this example, we’ll compare John and Jane’s rental property portfolio, comprised of approximately $300,000 in rental units, originally purchased for $30,000 in 1970. John and Jane have already depreciated the value of the rental property over the standard 27.5 year schedule.
John and Jane decide to gift the rental properties to their son David. In doing so, they avoid their nursing home costs, assuming they are healthy for five years, and Pennsylvania Inheritance tax at 4.5% ($13,500.00). However, David cannot deduct the $10, 909.00 depreciation over the next 27.5 years from his income. Assuming David is in the 25% income tax bracket, this would cost David $102,000 in income taxes. Overall the rental portfolio gift requires David to PAY $88,500 in taxes.
Alternately, John and Jane decide to transfer the rental units into a trust for their benefit and for David upon their passing. They will avoid their nursing home costs but not the Pennsylvania Inheritance tax at 4.5%, costing $13,500.00. Upon their passing and David paying the Pennsylvania Inheritance tax, he may now deduct the depreciation from his income over the next 27.5 years. This amounts to a savings of $102,000.00. The net benefit of transferring the assets into a trust would be a SAVINGS of $88,500.00.
Don’t fall victim to the easy, but costly, solution of gifting assets without understanding the implications and risks of doing so. Establish a comprehensive estate plan considering the current costs and future expenses for your loved ones. If you have questions regarding Estate Planning, we can help.
Count on Mooney
Our legal team has decades of experience in complex estate planning. We stand ready to assist you in your time of need and you know you can Count on Mooney, whatever your legal need.
Mooney & Associates has 15 offices spread throughout Central Pennsylvania including: