Two alternatives to leaving your children your investment properties.
It’s always a nice thing when you can transfer wealth to your kids by leaving them the properties you own. However, while you may be leaving them wealth in the form of residential real estate, you might also be leaving them with a headache.
What do the children do with the homes? Chances are they don’t want to be landlords. One of them might want to live in one of the properties and buy out the others. Another might not want to sell the properties at all, while others might think that selling is the best idea.
Think about it: You’re leaving them the homes and appointing usually one executor in the family to make those decisions about the estate. That can cause problems, uncomfortable conversations, and strife between the siblings. I’m sure that’s not any parents’ intent when leaving houses to their children, but what can you do to make sure the kids will be able to have a nice Thanksgiving together? As it turns out, you have a few options.
For one, you can sell the home(s), pay the taxes, and have the cash ready for them to inherit when the time comes. Not everyone likes this option since it involves paying taxes, but do you really weigh paying taxes over having a happy family?
“While you may be leaving your children wealth in the form of residential real estate, you might also be leaving them with a headache. “
Alternatively, you can do a 1031 tax-deferred exchange. That will allow you to defer the taxes and roll the proceeds from the sale of your home(s) to buy another property. However, you don’t have to use the money to buy another house; you can use it to purchase commercial real estate instead.. It’s possible for you to own a building, lease it out to various businesses like banks or restaurants, and then that tenant will be responsible for the upkeep of that property.
That is known as a triple-net lease, which is a net lease structured as a turnkey investment property under which the tenant is responsible for the property taxes, insurance, and maintenance. All you have to do is collect the check. This type of property is a great option to leave the children, as there wouldn’t be any family history tied up in it, and it doesn’t leave them personally responsible for the upkeep of the property.
If you have any further questions about estate planning or 1031 exchanges, don’t hesitate to give us a call or send us an email. We’d love to speak with you.