People often devote a massive chunk of their time for planning vacations and reading restaurant reviews, but rarely think of estate planning and investment. For most Americans, a substantial part of their wealth comes from real estate investments and this makes it important to utilize estate planning for tax advantages. If you are a real estate investor, estate planning allows you to optimize capital gains while reducing your tax liabilities. Here are five key points that every real estate investor should consider for advantageous ownership:
Real estate investments do not qualify for tax exemption on lifetime capital gains.
A spousal rollover remains tax-deferred until the property is sold or the surviving spouse dies.
Estate equalization, mortgage repayment, real estate fluctuations and capital gains create a need for liquidity.
Estate planning facilitates the strategic organization of assets to ensure that you attract a minimum of taxes on real estate holdings. It can be very complicated, but this solid plan will keep you organized and on track at all times. Follow these five estate planning strategies to ensure that all your assets are passed on to your designated beneficiaries without inviting any familial discord.
Capital gains derived from the transfer or sale of a principal residence are not taxed. However, an investor can only have one principal residence for the entire family unit.
For any property that is held in joint tenancy, the ownership remains with the surviving spouse and upon the death of the surviving spouse, the will dictates the distribution of the property.
You need to ensure adequate liquidity when preparing your estate plan to make sure that all the costs arising out of your property tax deferral program are covered. It helps in reducing the burden of repayment on the beneficiary when the estate is transferred.
When children are not in agreement with the way you wish to dispose of your property, you can consider estate equalization and use your assets and cash as a replacement to the interest.
When liquidating property, it is important to ensure that it does not give rise to interpersonal conflict and family harmony is maintained.
The capital gain derived from the disposition of any recreational property is taxed. Tax is deferred only if the property is held in joint tenancy, but if it is left to the surviving spouse in the will, it will attract tax on transfer.
If the property is left outright to the surviving spouse who remarries it may end up in the hands of an unintended beneficiary. A spousal trust can be created to avoid this scenario and to avoid tax on capital gains. A spousal trust allows the testator to designate the inheritors of the property when the surviving spouse dies.
Transfer, sale or distribution of property results in capital gain or loss depending on the condition of the property and its market value. Capital cost allowance can be claimed if the property in question is rental. If the market value of the rental property exceeds the capital cost, the tax is payable on the recaptured value. If the value is less than the capital cost, it will result in a loss which can be deducted against other gains.
The real estate properties that are doing well should ideally be transferred to desired beneficiaries or surviving family members. Any liquidity that is required to pay taxes should also be funded in advance to ensure that the inheritors don’t have to face any financial difficulties in future.
Estate planning experts are of the opinion that investing in commercial property through a holding company can prove to be highly beneficial when the income is split. If needed, you can also buy shares of the holding company through a family trust.
When a real estate investor dies and the property is disposed of, the capital gains arising out of the disposition may trigger taxes which can be problematic for the grieving family. This is because property cannot be sold off as easily as other valuable assets. Solving the liquidity issues beforehand will save the estate executors from tax implications, especially if the real estate market is unfavorable or constantly fluctuating.
Life insurance proves to be the most feasible and practical investment for providing the necessary liquidity when the circumstances are critical. The benefits of investing in a joint life insurance policy are: the cash in the estate remains tax-free for a few weeks; the will is not subjected to probate when the policy has a beneficiary named; the proceeds of the policy remain protected against the claims of future creditors.
Fix and flip, rehabbing the property and wholesaling real estate are lucrative short-term investments. For long-term benefits, you may consider owning rental property. Hire a CPA to help you determine the right entity structures for you.
Rental property is an easy way to earn cash from a depreciating property even with maintenance costs. It generates a constant flow of cash that is tax advantaged until the time you own the property.
Investing in rental property allows you to earn a good amount of money without incurring tax liabilities. You can also buy a property, fix it and sell it at an attractive price while incurring a much lesser tax liability. Another way to reduce your taxes is opting for 1031 exchange, which allows you to move your capital gains into a new property.
The real estate arena is highly competitive but following these tips will surely help you make profitable real estate investments.
Zoe Lawford studied marketing management and currently works as an online marketing associate for Blossom Wealth Management. She has been involved in a lot of research in the areas of wealth and investment planning and likes to share her experiences on various platforms. Email her at Zoe@blossomwm.com or visit Blossom Wealth Management if you’d like to learn about wealth management.
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