I am planning on purchasing a property that hopefully will grow in value over the years. (the next 25 or 30 years)

I plan to hang onto the property, rent it out, and will it to my heirs.

I understand that there will be a new “cost basis” at my death, but:

1) How does that affect my life long gift tax? Presuming the current tax laws.

2) Should I gift $11,000 of equity each year in the process?

3) Would it be a better idea to place it into an LLC?

delite

no gift tax unless a gift is made. as such, upon death there may estate taxes. In the interim to protect yourself and the asset, it may be advisable to have an LLC hold the property.

Fr_Chuck

Have you ever owned rental property ??? the ruined rugs in the first renter, holes in the walls, all the doors and range missing after the tennant moves out. Calls at 2am when the hot water heater does not work and so on.

If you never owned rental property, talk to people who does.

ebaines

Not sure how you would gift $11K/year of the property, unless you have set up some sort of partnership with your heir(s) in which their ownership percentage would increase over time. Using gifts as part of an estate plan is a good idea, but it may get awfully complicated trying to gift a property piecemeal like this. You obviously have other assets - it's certainly a lot easier and less of a paperwork nightmare to simply gift stocks, bonds, or cash each year to your heir(s) instead of a portion of a partnership. If you're really keen on owning an investment property, simply treat it as part of your estate. But I agree w/ FrChuck - think twice, and consider also how your health and personal interests may change over the next 20 or so years.

AtlantaTaxExpert

FR Chuck hit it on the head!

It takes a special type of person to be a landlord; I tried it and failed miserably.

Owning rental property can be very lucrative over the long haul, but it DOES have its share of headaches!

pacific nw

Yes, I've owned and still own rentals. Yes, it is a headache sometimes but the advantages for me outweigh the headaches. (I'm sure that is not true for everybody.) One of my rentals went from a value of $147,000 in 2001 to $550,000 in 2007 with a steady renter and no phone calls or emergencies. That puts me in an obvious tax liability. I don't need to sell the property at this time and would like to just hang onto it for my two children to split down the road. The renter has no intention on moving in the next 10 years. (Reasonably certain about that.) I'm in a major metropolitan area that is seeing job growth and rising housing prices even in this market. The house is in a desirable neighborhood.

So, I guess my question is:

How do I maximize preservation of equity and minimize tax obligation over the long term?

AtlantaTaxExpert

Go see a CPA about structuring the gift so you can make a $22K to each child ($11K from you, $11K from your wife), for an annual tranfser of $44K. After about 15 years, you could transfer the property in toto to your two children, all while receiving the rent each year. The details of this is too complex to explain here. Make sure the CPA has estate planning experience.