If you're like most individuals, real property is a significant portion of your estate—it may even be the single largest asset you own. You want to enjoy and protect your property, but you also want to make sure your property is transferred according to your wishes. To complicate matters, real property transfers are subject to special taxes, including the property transfer tax, the capital gains tax, and estate and gift taxes. That's why Bart Leonardi has a few tips on what to consider when it comes to transferring real property.
In order to create a comprehensive estate plan, you should have a complete picture of all of your assets, and real property is no different. Be sure to consider not just your family home, but also your vacation home(s), and any other land you may own. You should also include any property owned by a small family business.
When compiling a list of your real property, collect copies of your deeds, and make note of the original purchase price of the property. Knowing how much you paid for property will give you a better sense of the tax implications for property transfers. Keep this information together in a notebook or folder; it will save your estate executor a lot of time if your estate needs to be administered through probate.
After you finish making a list of all of your real property assets, you should consider the goals you want accomplish with your property ownership, both during and after your lifetime. Whatever your goals may be, the important thing is to consider your needs and desires, and the needs and desires of your family.
For example, for a lot of families, their goal is simply to enjoy their property for as long as possible during life and then ensure that it is transferred according to their wishes at death. For others, it may mean downsizing into a smaller home and using the excess money to buy a vacation home somewhere warmer. Families with a special needs child might want to sell their home and use the proceeds in trust to pay for their child's needs throughout the child's lifetime.
After you've decided on your goals, learn your options. When it comes to real property transfers, you have plenty. This section highlights a few of the more common options.
Transfer by Will. Transfer by will is probably the most common way to transfer real property. Using this method, property owners are able to enjoy their property to maximum extent possible while still ensuring that the property is disposed of according to their wishes.
Transfer by Trust. Transferring property using a trust arrangement can allow the owner to continue to use the property during his or her lifetime, but avoids the time, hassle, and expense of probate. Trusts can be formed to take a wide variety of considerations into account, so it is also a good option for families with unique goals.
Transfer by Deed. A transfer by deed may be appropriate for some lifetime transfers of property. For example, if your property has appreciated significantly since your purchased it and you want to avoid a large capital gains tax on a transfer, you can gift your property by deed. (You may, however, incur a gift tax.)
Joint Tenants with Right of Survivorship. You can also transfer your property into a joint tenancy with right of survivorship. Joint tenants own property together, and when one joint tenant dies, the property passes to the other joint tenant automatically.
Life Estates. You might want to transfer property to your surviving spouse for his or her lifetime and upon his or her death to your children. This arrangement is known as a life estate, and it is a common estate planning technique for married individuals. It gives your surviving spouse the right to live in the family house until his or her death, but it also allows you transfer the property according to your wishes afterwards.
All transfers of real property implicate certain tax concerns. For example, your transfer may be subject to a property transfer tax, estate and gift taxes [insert a hyperlink here to the avoiding estate taxes blog], and capital gains taxes. Despite the recent housing market, historically, real property has typically appreciated in value. On a basic transfer of real property, you may incur a capital gain, which is the amount by which your sale price exceeds your purchase price, known as your cost basis.
However, with proper planning, you can avoid the capital gains tax. One way, gifting, was described above. You can also avoid the capital gains tax by transferring your property at death. In fact, this is one of the biggest advantages to transferring real property by will. When you transfer property at death, your beneficiaries take the property at a basis that is "stepped-up" to the fair market value on the date of death. Thus, your capital gain on the transfer is essentially erased.
The tax and estate planning considerations for real property transfers are numerous and complicated. That's why the Cleveland estate planning and probate law firm of Bart Leonardi is here to help. We focus on developing comprehensive estate plans to help accomplish your goals while minimizing your tax liability.
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