Ways to Own Rental Property and Pass It on to Your Heirs
Published July 12, 2022Share this article
Owning real estate has been a tried-and-true path to creating generational wealth. A common strategy is to own property and pass it on to your heirs while taking advantage of the step-up in basis.Most of the time, real estate appreciates and is worth more than when you bought it. The step-up in basis raises the cost basis to the price of the asset when you pass away — which means your heirs will face lower capital gains taxes when they sell the property later.There are many ways to do this.Passing down properties to your heirs can be a complex process. There are several ways you can own property and pass on properties, but some may be better for you than others. Get it wrong, and you might be leaving your heirs with liabilities instead of assets. Get it right, and you could pass on a valuable piece of real estate to your family without all the expensive tax implications.Below, we’ll walk you through 3 common ways to own property — and we’ll break down the options so that you can evaluate which is the best for you when it comes to transferring ownership to your heirs.
3 Traditional Ways to Own Rental Property and Pass It To Your Heirs
1. Owned Individually
The most obvious way to purchase an investment property is under your own name. This helps you avoid legal fees and heftier liability insurance premiums — and it also increases your chances of obtaining a mortgage from a bank (because it’s easier for them to chase down personal assets if you default on payments).However, when you pass away and give your properties to your heirs, the probate process and legal fees could eat up as much as 15% of the estate’s total value. Also, in some states, it’s not possible to rent out a property while it’s under probate, which could put a financial strain on your beneficiaries (especially if there’s still a mortgage on the property).A workaround for this process is adding your heirs as co-owners to your current property assets. However, this can trigger a “gift tax” upon your passing — and it also causes bigger headaches if you want to make any changes to your property (sell or refinance) before you pass away.2. LLC
Some real estate investors choose to purchase properties under a limited liability company (LLC). This reduces personal risk by protecting owners in the case of a lawsuit. For example, if someone filed a claim against your property (for some reason), they wouldn’t be able to chase down your personal assets — they could only sue for what the LLC owns.LLCs can also help when you’re passing assets on to loved ones and want to minimize estate and gift taxes. Members of an LLC can also transfer value through membership units of the LLC. If you want to pass on rental property in your LLC, you can divide the membership units to distribute to heirs rather than granting fractional deeds to each.Also, when you transfer these units, the “value” for non-controlling members is far lower than the market value. This can decrease the value by up to 40%, which means the taxable event is reduced and even avoided if you stay below a $16,000 transfer per recipient.However, you’ll have to pay an annual fee to maintain your LLC status, and this can range from $50 to $250 depending on the state (and it can be even more if you pay a professional to handle it for you).3. Trust
Similar to an LLC, a trust is another legal vehicle that allows you to purchase your property without putting it under your name. A trust is a legal vehicle that will hold on to the title to pass it on to the beneficiaries to help them avoid expensive taxes.With a trust, the third party is known as a Trustee, and they’re responsible for making sure that your real estate is distributed in the manner you desired.Trusts help your beneficiaries avoid probates and get access to the real estate quicker than if you use a will. Trusts can also help your heirs avoid unnecessary taxes at the time of your death.Flock Offers a 4th Option
Want to pass on value to your heirs without any of the hassle? Get started with Flock.When you transfer your rental property to Flock for shares in their portfolio of homes, you are creating a simple inheritance scenario for your heirs. When you are gone, they will receive the shares without triggering a taxable event. This allows them to redeem the shares on their own schedule (or over time) to reduce tax implications.When you use Flock, your heirs won’t inherit a property that requires ongoing maintenance, repairs, and possible tenants — especially if your property is far away from where your family lives. Instead, they inherit shares that deliver quarterly income while the investment continues to invest — it’s a win-win for everyone.It can be difficult when you give a different percentage of a physical property to each of your heirs, especially since they now have to decide whether to keep it, sell it, rent it, and figure out how to distribute the funds. Flock’s structure makes it easier to split up the property and gift shares to different recipients, removing complications and making things simple and easy for everyone involved.The structure we use at Flock is a common estate planning tool — it allows owners to seamlessly exchange rental property for shares in a portfolio of homes that we manage. You’ll get steady income and upside potential without any of the headaches of traditional ownership.When you pass away, you can distribute shares from your investment among your different beneficiaries. Shares within this trust aren’t taxable at the time of transfer, though — so your heirs won’t face any financial burdens at the time of your passing. Instead, they can hold on to the shares and continue receiving quarterly income — or they can wait and sell the shares during more favorable tax situations.Ready to get started? Just head on over to our website, enter your property’s address, and we’ll send you a free valuation offer within 24 hours. Simple as that.Landlords, retire and minimize taxes.
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