Smart real estate tax planning is something to be aware of when it comes to family wealth management. From rising property values to the potential for significant gains tax upon a sale or inheritance.
It’s good to be aware of all the factors that play into real estate and how to get the most out of your property investments, whether that’s for the benefit of your finances or those who will benefit from them once you’ve gone.
With that being said, let’s look at some of the key factors that are contributing to the need for smart real estate tax planning now and for the benefit of the future.
Significant appreciation of properties
There’s been a substantial rise in real estate values over recent decades, which means that the properties you have may often represent a significant percentage of your family’s total net worth.
The appreciation that has occurred, while beneficial for equity, can create a larger potential tax liability if the asset is eventually sold or transferred to any heirs you’ve selected.
Capital gains tax exposure
It’s good to be aware of capital gains tax exposure. Upon the sale of a property, families can face substantial federal and state capital gains taxes on the appreciated value of the property.
The bigger the appreciation of the property, the more capital gains tax you’re likely to be exposed to. That’s why it’s important to have effective tax planning in place. This effective tax planning includes strategies that help to minimize these taxes, like utilizing a 1031 exchange to defer gains by reinvesting sales proceeds into another investment property.
Another option is leveraging primary residence exclusions when applicable.
Estate and inheritance considerations
Without the proper planning in place, transferring real estate to the next generation can trigger income taxes or estate taxes on the ‘built-in’ gains.
Strategies like the step-up in basis rule at death are something that can be critical. This can adjust the property’s value to the fair market value at the time of the owner’s death.
As such, that rule can potentially wipe out all the pre-death capital gains for the heirs expecting to receive the property.
Multi-generational management
Real estate is considered a long-term asset and often held for generations. Therefore, it’s important to establish the right ownership structure to ensure seamless management, protect assets from creditors, and help facilitate the distribution of income efficiently amongst any and all beneficiaries.
Changing tax laws
There are always going to be changes in the tax laws, so you must be aware of them. It’s therefore helpful to reach out to the right professional tax experts for helping get the most out of your real estate tax planning.
The complexity and potential volatility of tax legislation necessitate ongoing strategic planning. It’s good to be proactive as a family to adapt to the new rules set so that your deductions and credits can be maximized to what’s available.
Real estate is no longer a passive asset. It’s an active financial instrument that requires a lot of careful planning and knowledge to ensure your tireless efforts in building wealth do not get compromised by tax laws and taxes in general.
