Blogging from Heckerling: Post Six

Dishing the Dirt on Planning for Real Estate Investors

“Real estate is a marvelous asset to own. It is tangible, immovable, and they aren’t making any more of it. It is a finite asset.”  But with the forthcoming tax changes and their direct impact on tax planning in the real estate arena, Farhad Aghdami (Williams Mullen, P.C.) took a fresh look at some well-known strategies for minimizing liability and maximizing benefits associated with real estate investors. From valuation discounts to planning opportunities to payment of estate taxes, Mr. Aghdami addressed these key concepts relevant to today’s real estate investor.

There are three primary considerations when utilizing real estate as a wealth planning strategy – valuations, entity type, and timing. The concept to remember when valuing real estate owned by a separate entity is that it is the entity itself that is being valued and not the underlying assets.  This provides a framework for several discounts to be included in the planning.  With every succession plan there is an end game. Use of the correct entity helps ensure that the intent of the family is properly executed.  Due to the longer life of a real estate asset, entities that lend themselves to longer timeframes are more likely to be successful and cost efficient.  And while it is never too early to plan for transfers of wealth, the current tax environment provides us with a very large estate tax exemption. In light of this reform, “Does it make sense now?” is more important than ever.

There are several interesting strategies to consider, if the timing is right.   Transferring real estate using grantor trusts allows the taxpayers both income tax and estate tax benefits.  Gifting of a small interest to an individual allows the individual to reside rent free, as a tenant in common, with the right to occupy 100% of the time.  However, Mr. Aghdami noted that prior to the implementation of a transfer, real estate owners and investors should review their contracts to ensure that their planning does not conflict with any clause, as the ramifications could be as severe as converting non-recourse liabilities to recourse liabilities or requiring the loan to be satisfied within a significantly shorter time frame.

In summary, Mr. Aghdami reconfirmed that there are many strategies a real estate investor can implement in order to achieve their family’s succession plan.  Investors should be sure to match their intent with the implications that any given strategy will provide. 

 Blogging from Heckerling 2018

Stephanie Hines, Partner in EisnerAmper Personal Wealth Advisors Group, provides expertise in planning and compliance for ultra-high and high net worth individuals in the areas of personal and fiduciary income taxation, succession and estate taxes.

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