Author Topic: Fortune situation  (Read 1076 times)


  • 5 O'Clock Shadow
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Fortune situation
« on: December 07, 2017, 07:51:35 AM »
Although the tax reform bill is still in conference and hasn't been passed, and the final bill will require study in conjunction with a discussion with a real estate savvy CPA to understand its implications on my particular real estate question, I am hoping someone on this thread can weigh in with some general advice. Please excuse the long post.

My parents are "buy and hold" small time landlords with a 2 boutique commercial buildings (1 building has three units and the other is one full building - both rented) and 4 residential properties they rent out. These properties are mainly held Jointly in their names only, not in LLCs, but each property has good liability insurance and umbrella policies.

My parents structured ownership in their name only this way partly because they were not convinced that since they handle maintenance, tenant vetting, etc themselves., that LLCs were worth setting up for each property. That there wouldn't be a huge benefit to it. I guess with such hands on management the corporate veil protection of an LLC could be easily pierced was part of the reasoning. However, one of the residential buildings is currently held in a partnership with the parents, and with me and one of my siblings.

There are no separate bank accounts for these properties and money is just being deposited into one account., which I think needs addressing. These buildings bring in good rent, are centrally located in a major city, are well kept, and were a side business for my parents when they were working. This year they retired and are living on rental income from these properties. They've never really been strict about all the itemized deductions as landlords they could be taking (travel expenses, repairs etc.) or used spreadsheets to track things like rent. They were basically accidental landlords, who worked hard at their other professions, who were lucky to have good tenants.

These building will pass down to me and my sibling ( my friend) as inheritance and will be 50/50 ownership. We would like to continue managing them as we currently help now and continue to learn about property management and related knowledge. We're trying to get up to speed on being future landlords. They've created excel spreadsheets to track expenses and rent. Encouraged separate bank accounts. Kept receipts for maintenance to itemize deductions etc., but I am curious as to some suggestions for the most tax advantageous methods they should be transferred us.

Our folks say they're happy to leave these to us. For tax reasons, should we ask that ownership be transferred to us now? Maybe via forming partnerships (or LLCs? or S Corps?) with all our names? Or would that be a bigger tax incursion?  Or should we just wait until after our parents have passed to assume ownership (the properties are held in a revocable trust where we siblings would simply Jointly inherit them). I know it's a morbid discussion, but since we stand to inherit these buildings it would be nice to get some general ideas on structuring the process. I know a CPA and tax attorney are also definitely probably the best bet in determing our particular situation. I just see a lot of knowledge on here as well.

Also, would be it best to continue keep these in name only but with high insurance polices as they are now? Or in an LLC(s)? Or Series LLC? Or in an LLC elected to be taxed as an s corp? Basically what would be a tax advantageous set up? The new tax bill sounds like there may be the potential for pass through entities to enjoy a 25% "pass through rate" if the House version  of the bill is enacted. So if that comes to pass would forming an LLC be worth it to enjoy that rate? Or is it easier to keep it in name only, so as not to incur the yearly filing LLC fees in our area (300?).

Any tips on property management or other ways to get up to speed on inheriting these buildings. and how we should prepare themselves, both from a management and tax perspective would be appreciated as well. Essentially, what would you do if you were in this situation? How can I prepare. My folks are in their 70's and I love them very much, but they want us to be prepared for the eventualities in life.

I know a CPA is going to need to wade into the nitty gritty, as this is a complex set of questions, but any general advice is appreciated. Thank you.


  • Bristles
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Re: Fortune situation
« Reply #1 on: December 09, 2017, 01:34:01 PM »
PTF.  I'm a fairly inexperienced tax preparer, and I have some immediate ideas, but I want to see what the experienced pros say.  Btw, great job on researching this now and getting active in the family business!  Smart cookie!


  • Stubble
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  • Age: 33
  • Location: OR
Re: Fortune situation
« Reply #2 on: December 11, 2017, 10:55:20 AM »
The biggest thing you would give up by transferring ownership now would be the step-up in the basis of the properties.  If they have held these for a long time, this could be a HUGE deal.  This is NOT something to be given up lightly.

Depending on how the transfer is managed there could be other tax consequences: use of the estate exemption if gifted (may not matter depending on which bill gets passed an how long your parents live), and/or taxable gain to your parents if you purchase the interest.

As far as structure goes, partnership or LLC taxed as a partnership would be the preferred structure.  Real property can get a little funky in a corporate environment, and there is no tax advantage to a corporation as rental income isn't subject to SE tax.

In addition to a reputable and experienced CPA, you should also be speaking to an estate planning attorney and have them coordinate.  There are several considerations, and it would be important to make sure you don't do something that can cause other problems later.