Is it tax-wise to pass on single-family home properties before my death to my kids? We have plenty of income, and passing on a few of them to our two kids might even lower our tax bracket. Each rental property is in a separate LLC, and we have owned them for 7-8 years now. What do you say?
Based on the way we answered the previous question about gifting? I think it's a bad idea, especially if you've had them for seven years; they've probably appreciated considerably. I would not gift these properties to my children.
Remember the rule? Yeah. One of these guys needs to remember the rule. If I gift Jeff a property, he gets my basis. If I have appreciated property and I die, it steps up, and Jeff never pays tax on all that gain. If I gift it to Jeff during my lifetime, he now has this lower basis, and all this becomes taxable. It wouldn't have been taxable.
So go ahead. I'm going to propose something and see what you think, Toby.
We talk about property managers a lot. There's nothing that says that your children cannot be your property managers or that you can't slide income to them from your lower your taxes. Yeah, you could set up a management, a family LLC taxed, a corp. Mm-hmm. They could sit on it. You could reimburse them for things like medical, dental, vision, cell phone, any tech that they need that benefits the business. Teach them how to do your business. And you could move money to eliminate some of that tax, get it over to your kids' tax brackets or in that case, would be zero so that when you have to pay tax on it.
One other thing I suggest, because it's come up a couple of times as if you got all these properties and they're all making money. You may want to consider cost segregation on one of the properties maybe, and you could do that over the next. To eliminate the tax. But you can eliminate the tax. You accelerate the depreciation. And depreciation is generally on a single-family home 27 and a half years. And you could break it into five, seven, 15-year property, and the 27 and a half, about a third of that property would be accelerated realistically under this scenario, probably into I mean, the five and seven-year property would be immediately deductible. Any amount that you haven't written off. Yeah. The 15-year property would be accelerated. A big chunk of that, like you wouldn't have the bonus depreciation. You just have a massive loss in the year that you did it.
I'm going to throw one other thing at this. Just because I'm always like the charitable stuff.
You want to get a nice tax deduction, set up a family foundation or family charity, and believe it or not, depending on the type of property this is, that could actually qualify as a charitable activity if it's Section eight or if it's housing for veterans, housing for single moms, housing for residential assisted living.
So if I look at this and I say, Hey, we have several rental properties, give it to your charity, your kids run the charity. They're they're entitled to salaries and fringe benefits out of that. Again, think all of their tech, all their stuff, reimbursements for medical and things like that. But it's out of your estate. Your kids can't screw it up there. They may if they have a broken picker and they're bad at spouses. Right. They can't lose in a divorce if anything happens to you. Nothing. It doesn't have to get probated, but you get a nice big fat deduction, and your kids get the joy of running a property that has a social benefit, and you get this big write-off.
So kids get to continue to operate that way. I bought this house for $150,000. It's now worth $350,000. What's my deduction? 350,000. I just live that this year. I did that exact scenario. I bought it for $90,000, and I think we did. What did that? What did our Florida property value? The one that we gave away. What was the fair market value? Let's say they'll see if she actually pops it in. She's listening. $330,000. Oh, wow. But we needed a tax deduction, and it was actually good. It was. I've told this story. It's not to pat his over the back right. But it was a gal that she got booted out of her house because her kids used it as collateral on some on some dubious business dealings. And she lost a house, and she's blind, legally blind. And she lived in the house for 30 years. They use it as collateral. She loses it. It's a guy now. So I went to the bank and I bought it back and said, Mom can stay there, you know? And I said, like, kid was good, I know them. I'm not going to get in all the specifics. But it was one of those things. I was like, I'm never going to get paid for this thing, and they're never going to. Never going to be able to buy it back, so mom can stay in it. So I put it gave it to one of my charities that does assistance for other people that are in need. And I was like, Hey, you can just live there for the rest of your life. You're older. I don't know how long, but you live there until you can no longer live there. I'm not charging rent or anything like that, so it's like, cool, this works great. I got a big deduction. I held it for a few years before I did that. So I get the nice tax deduction.
Yay, pretty much the deduction paid for the property. So that's why the government does it for you. So you can do that too. So I just want to sell it and add on a question: if the kids want to sell it to the charitable institution in the future, what happens then? It is tax-free; it's exempt. But the money is in the charitable institution and would have to come out either as payment for their services, so they could get salaries. They could, if it no longer does its charitable activities program, become a private foundation, which means they would need to give away 5% of its assets every year, and they could charge a wage until the money's gone. That's not uncommon. You know, a common misconception that we frequently run across is the nonprofit that I own. Time out. You don't own this nonprofit anymore. You control it. You control it. That's it.
But anyway, so you have options. You have options. If you're going to make the charitable contribution, it has to be done by December 31st. And give the LLC. Yeah. Yes, absolutely. Each property is in a separate LLC. You get an appraisal done and what's the form you're going to file with your 1040? Um, help me out here, guys. What's the 8283 8283 You're going to file the tax form that says with the appraisal, the appraiser signs the tax form, I should say, saying, here's the appraised values. And then if it's over 5000 bucks, that needs that appraisal. But you get that appraisal done next year if you really wanted to. Yeah. Like before you file your tax return and then it just has to accompany, and I'll see if anybody puts that up.
All right. This should be the last question. It's the 8283. You're very intelligent, sir. Oh, that's scary. Check that out. Hey, guys, if you like this snippet of Tax Tuesday, then I invite you to click the link and actually subscribe to become a Tax Tuesday member. Every other week, we do these live, and you too can ask your questions, and myself and my team will answer your questions on the next Tax Tuesday.
https://www.youtube.com/watch?v=UpXTpsdEP8s
In the provided text, the individual is seeking advice regarding the tax implications of passing on single-family rental properties to their children before their death. They mention that they have owned these properties for 78 years and are considering gifting them to their kids to potentially lower their tax bracket. The properties are held in separate LLCs.
The conversation continues with a discussion about the potential downsides of gifting the properties to their children, emphasizing the difference in tax treatment between gifting during one's lifetime and passing on the properties after death. The primary concern is that gifting during one's lifetime may result in the children inheriting a lower tax basis, which could lead to higher taxes when they sell the properties.
To address this concern, the conversation explores alternative strategies. One suggestion is to have the children act as property managers, creating a family LLC or corporation to manage the properties and potentially reduce taxes. Additionally, the conversation delves into the concept of cost segregation, where certain properties' depreciation schedules are accelerated to minimize tax liability.
The conversation also suggests a charitable approach. The individual considers setting up a family foundation or charity, and, depending on the type of property, donating one of the houses to the charity. This can lead to substantial tax deductions, and the children can be involved in managing the charitable activities.
Finally, the discussion touches on the importance of getting appraisals done for tax purposes and the relevant tax form, Form 8283, which is required for charitable contributions over $5,000.
In summary, the individual seeks advice on the tax implications of passing on rental properties to their children. The conversation explores the pros and cons of gifting during one's lifetime and offers alternative strategies, including property management, cost segregation, and charitable contributions, to potentially minimize tax liability and maximize financial benefits.