By Leonard Baron
Property Inheritance Stepped-Up Basis
Q. I am inheriting a relative’s nice rental property and am deciding whether to sell it. I hear there are some good tax benefits to selling, but also to holding. Help!!! Tina, S. Rockville, MD
A. Hi Tina, sorry to hear about the loss of your relative, but glad to hear you’ll be inheriting some property.
Generally, if you sell a property, you owe taxes on the difference between the current federal income tax (FIT) basis – usually what you pay less depreciation – and the net sales price for which it sells. When you inherit property, the FIT basis is adjusted upward to the market value. So if you sell it, you probably won’t have any “gain or income” from the sale, and won’t have to pay any taxes.
If you keep it as rental, the basis is still adjusted for FIT purposes to the current market value. You then can split the new higher FIT basis between land and building, and start depreciating the building value, which could save you a lot in taxes.
Neither of the above have anything to do with property taxes that you pay the county – that’s a completely separate issue and you need guidance there too.
Either way, talk to a tax professional for the specifics. Good luck!
Self- Directed IRA Into Real Estate
Q. I understand you can use your IRA to buy real estate, is that correct and how does it work? Bob M., Chicago, IL
A. Yes, I do. But, it is a little complicated, and there are costs.
This is general guidance, so I strongly advise you to talk to a professional advisor. My method is to open an IRA account and transfer an existing IRA account cash into the self-directed account. Then, you can buy real estate with that money. There are costs to maintaining that IRA custodial account, so think about those.
Here are some of the gotchas:
- It cannot be a personal residence
- It cannot be something you already own
- You also lose the ability to use rental losses against your regular income
- You cannot get a mortgage for the property – so you must pay cash or get an expensive hard money loan
- There are fees, insuring it may be a challenge
- It's easy to violate the IRS rules, which would break the IRA and you’d owe taxes and penalties
However, many people do this to their advantage, and it’s worth a look if you have a lot of money in your IRA.
Consult with a certified public accountant or a lawyer. Also, saving taxes on real estate should be the icing on the cake. Go for a good property as your main goal and if you can work a smart tax strategy, good for you!
Leonard Baron, MBA, is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt!
Email Your Questions to: Leonard@ProfessorBaron.com