Investing in real estate is a popular strategy that many take advantage of to build wealth. Some people purchase unimproved land. Others may own rental properties. There are also some individuals who acquire multiple vacation homes in a variety of different locations.
Regardless of whether real property holdings are for personal use or financial diversification, the owners of those properties need to think about the long-term consequences of holding high-value assets. As real estate prices consistently trend upward, those properties may put the owner or their family members at risk of significant tax obligations.
When an estate must go through the estate administration process, high-value real estate investments could create a variety of different tax obligations, particularly if they are held in more than one state. If there are enough properties in a real estate portfolio, there may be reason to worry about estate taxes. The sale of those properties could also lead to capital gains taxes. How can real estate owners and investors address real property in their estate plans to limit tax liability?
Consider shared ownership to avoid probate
Drafting and recording a deed is one of the simplest ways to limit tax liability. A co-owner can theoretically assume ownership of a property after one owner dies.
The property does not have to pass through probate court, which helps eliminate the risk of estate taxes. Such arrangements can work in scenarios involving vacation properties or where owners want each of their beneficiaries to receive one or more of the investment properties that they own.
Establish a trust or LLC to separate property from an estate
Another common tactic used to limit estate taxes is to create a legal entity to hold the title to real property. Both trusts and limited liability companies (LLCs) can create a degree of separation between an individual owner and the assets they have acquired.
Assets owned by an LLC or trust are not part of an estate and are therefore less likely to cause tax complications. Keeping valuable assets out of an estate can reduce the risk of estate taxes or at least reduce the final tax rate that applies.
There might be other reasonable estate planning solutions for those with real estate holdings in multiple states. Reviewing a portfolio of properties with an attorney can be the first step toward an estate plan that minimizes tax liability.