What wealthy parents need to know about giving real estate to heirs
A local house with a porch in Edgartown on Martha’s Vineyard, Massachusetts, USA.
Wolfgang Kaehler | Lightrocket | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
The great wealth transfer is leading to a great real estate transfer, with up to $25 trillion in real estate owned by older generations that could get passed down — and fought over — in their families.
According to Cerulli Associates, $105 trillion is expected to be passed down by baby boomers and older generations by 2048. Real estate, including primary and vacation homes, as well as investment properties, is expected to be a large component. The silent generation and baby boomers own nearly $25 trillion in real estate combined, according to the Federal Reserve.
Yet with property comes conflict. Wealth advisors say handing down real estate is increasingly filled with both financial and emotional pitfalls for families, ranging from taxes and maintenance costs to disputes over ownership and usage. The straightforward solution is just to sell it and divide the proceeds.
“Some people want to retain the house and other children don’t,” said BNY Wealth’s Jere Doyle. “I can tell you, as a practical matter, there’s going to be fights. There’s going to be disagreements. You’re not going to have the perfect situation.”
But lawyers and wealth planners say there are measures families can take to more effectively pass down real estate to minimize taxes, costs and family battles. Here are five secrets to successful real estate inheritances, whether it’s an apartment on Park Avenue, a beach house on the Vineyard or a ranch in Montana.
1. Transfer real estate in your will or through a trust to avoid a major tax bill.
Passing down vacation homes is the most fraught, said Elisa Rizzo of J.P. Morgan Private Bank. Her clients often downsize their primary residences later in life, but families stay attached to their second homes.
“That vacation home, often for our families that are very mobile, becomes the centering place,” said Rizzo, head of family office advisory at JP Morgan. “The vacation homes are where people go, and they make really special memories with one another, whether it’s a ski house up in Vermont or a vacation home on Nantucket.”
Doyle advises against gifting long-held real estate before you die. If your heirs choose to sell the property, they have to pay capital gains taxes on the property’s appreciation since the parents originally bought the property.
“If you give during your lifetime, the kids take your cost basis,” said Doyle, senior estate planning strategist for BNY Wealth. “One of the things that people have to bear in mind is that the senior generation probably didn’t pay an awful lot for the property.”
There are ways to minimize the tax burden, such as using a qualified personal residence trust….
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