Gifting real estate

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Hi Folks,

I was hoping to get some advice here on how to proceed. Please let me know if more details are needed.

My wife's Mother is leaving the country (at the end of this month, so time is of the essence) and wants to gift her some commercial real estate that she owns.

a) The commercial property (a condo/office in a multi unit building) is worth under $200k and is under lease by a tenant (tenant has been there for 10+ years).
b) Property has no mortgage (completely paid off)
c) Property is in Maryland
d) We have NO intention of selling this property within the next 5-10 years.

My wife has spoken to a couple different attorneys (by phone and email) as well as our accountant, but unfortunately she's received completely different advice from each person.

Summary of suggestions by aid professionals (I'm getting this information second hand from my wife, so some details may have been misinterpreted):

1) Have wife buy property from Mother as owner owned financing. Mother will then gift $14k a year to daughter and husband (me), paying down the balance.

2) Accountant: Put the property into a trust and have Mother gift $14k a year (I have the least understanding of what was meant for this one).

3) Lawyer: Open an s-corp or llc and have the Mother sign the deed over to the company. Liability protection was cited as for the reason to open an s-corp.

Now I don't quite understand why it has to be so complicated. I think the 3rd suggestion is actually the best one, minus the s-corp part. We go to whatever office we have to go to (title company?), and the Mother signs the deed over to my wife. I see no reason to start a s-corp for liability purposes. The condo fees pay for anything that happens in the building/on property, and the tenant has insurance that would cover anything that happens within the office. The lawyer also quoted my wife $500 to open the s-corp (something I've actually done for myself recently in one day) and 'do the shares'. I don't know what the latter means (bless my wife's heart).

Please me know if more details are needed and I appreciate any advice or insight that is shared.

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The simplest approach without tax consequence is just to gift it and account it under the lifetime estate basic exclusio... (more)

fh8510 (Apr. 19, 2013 @ 3:41a) |

The suggestions that you have received are quite good. Actually, there are different options to deal with this situation... (more)

Jerry91 (Apr. 19, 2013 @ 4:49a) |

I have a bit more information.

First though, thank you everyone for your help and advice. It really helped guide my resea... (more)

Cooz (Apr. 19, 2013 @ 5:35p) |

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They all should work, but I don't like #2.

While I'm no attorney and not familiar with Maryland law I at face value like #3, but just realize that it may not strictly speaking be legal for her to just contribute the property to the corp and have you receive a large portion of the equity with no cost to you or report of gift on her part. The shares will constitute a gift equal to their value.

So what you'd probably end up doing in #3 is similar to what you would #1 except she would gift $14k worth of shares a year or she just might use some her(now massive under current law) estate/gift exemption to do it. Understand that the $14k is only the amount for annual gifting that doesn't count against the lifetime exemption.

I would go back to the attorney and make sure his recommendation came with the intention of your mom to report the value of those shares given to you as gifts and that he was intending to structure it so her part of her lifetime exemption was used.

It might be something like 50-50 with her gifting $14k a year worth after that or something.


I don't know there are numerous ways to structure such a deal just realize that either way it's going to be a gift of some sort.

I also think there's no need for an entity in #3. Just more work for no major gain.

taxmantoo said:   I also think there's no need for an entity in #3. Just more work for no major gain.

Well maybe Maryland is worse than most states on that front, but usually it's just one more very cheap veil to pierce in terms of liability so why not.

But if the OP doesn't care than just go with #1 or some augment of #1 with mom's lifetime exemption used.

dshibb said:   taxmantoo said:   I also think there's no need for an entity in #3. Just more work for no major gain.

Well maybe Maryland is worse than most states on that front, but usually it's just one more very cheap veil to pierce in terms of liability so why not.


Why not?
Automatic step-up in basis in real estate upon inheritance beats automatic step-up in basis of shares in a holding company IMO, is why not.

Some attorney wanting to make some billable hours put a cheap rental house in a C-corp. Client didn't like to pay for preparation of an 1120 every year for his $6k of rent receipts. When he learned of the capital gains implications of taking the house out of the corporation, he decided to leave it alone and let it be his heirs' problem.


In some states, there might be limitations on property tax that get lifted when the property changes hands. If those limits hold for corporate owners during a change in ownership, then it might be worth titling in trust/corp/LLC for that reason.
In Michigan, those limits hold for family transfers so no gain here. Attorneys and accountant should have gone over this with her if it's a factor under Maryland law.

taxmantoo said:   dshibb said:   taxmantoo said:   I also think there's no need for an entity in #3. Just more work for no major gain.

Well maybe Maryland is worse than most states on that front, but usually it's just one more very cheap veil to pierce in terms of liability so why not.


Why not?
Automatic step-up in basis in real estate upon inheritance beats automatic step-up in basis of shares in a holding company IMO, is why not.

Some attorney wanting to make some billable hours put a cheap rental house in a C-corp. Client didn't like to pay for preparation of an 1120 every year for his $6k of rent receipts. When he learned of the capital gains implications of taking the house out of the corporation, he decided to leave it alone and let it be his heirs' problem.


In some states, there might be limitations on property tax that get lifted when the property changes hands. If those limits hold for corporate owners during a change in ownership, then it might be worth titling in trust/corp/LLC for that reason.
In Michigan, those limits hold for family transfers so no gain here. Attorneys and accountant should have gone over this with her if it's a factor under Maryland law.


Wait what the hell is the difference between a step up in basis on real estate vs. a step up in basis on a shares of a holding company? I've never heard of anybody worried about the distinction(hell never even heard of anybody ever even bring up the distinction). They should be valued the same.

So it's not a simple "sign the deed over" task?

Cooz said:   So it's not a simple "sign the deed over" task?

Gift or 'arm's length' transaction

Cooz said:   So it's not a simple "sign the deed over" task?
If you don't have a recent appraisal, you'll probably want to get one. That way the Feds won't later decide your number for the sale/gift/whatever wasn't too high or too low.

Don't forget about excise tax and title insurance. It all cost money. I would prefer a gift rather than a sale.

dshibb said:   taxmantoo said:   dshibb said:   taxmantoo said:   I also think there's no need for an entity in #3. Just more work for no major gain.

Well maybe Maryland is worse than most states on that front, but usually it's just one more very cheap veil to pierce in terms of liability so why not.


Why not?
Automatic step-up in basis in real estate upon inheritance beats automatic step-up in basis of shares in a holding company IMO, is why not.

Some attorney wanting to make some billable hours put a cheap rental house in a C-corp. Client didn't like to pay for preparation of an 1120 every year for his $6k of rent receipts. When he learned of the capital gains implications of taking the house out of the corporation, he decided to leave it alone and let it be his heirs' problem.


In some states, there might be limitations on property tax that get lifted when the property changes hands. If those limits hold for corporate owners during a change in ownership, then it might be worth titling in trust/corp/LLC for that reason.
In Michigan, those limits hold for family transfers so no gain here. Attorneys and accountant should have gone over this with her if it's a factor under Maryland law.


Wait what the hell is the difference between a step up in basis on real estate vs. a step up in basis on a shares of a holding company? I've never heard of anybody worried about the distinction(hell never even heard of anybody ever even bring up the distinction). They should be valued the same.
C-corps and S-corps have different inside and outside basis.

If you own assets directly or through a partnership, the assets get a basis step-up when the owner passes away. If you own the asset through a C or S-corp and the owner passes away, the basis in the C or S-corp stock is stepped up but the basis of the assets inside the corporation is not stepped up. This is why holding RE inside of a corp is not a good idea from an income tax perspective.

- I'd like option 1 if it were just a residential property. Options 2 & 3 sounds like accountants/lawyers making money setting up a trust & biling a 1041 filing (not knowing any more about all the estates net-worths etc)/lawyer making money with an unneccesary corp filing.

- Think the question you have to ask yourself is what are your goals (short term & long term) with this property then let the pros make suggestions based on what YOU want to do with it. Remember when dealing with counsel & CPAs you're the boss. Better to do it that way.

theman2 said:   dshibb said:   taxmantoo said:   dshibb said:   taxmantoo said:   I also think there's no need for an entity in #3. Just more work for no major gain.

Well maybe Maryland is worse than most states on that front, but usually it's just one more very cheap veil to pierce in terms of liability so why not.


Why not?
Automatic step-up in basis in real estate upon inheritance beats automatic step-up in basis of shares in a holding company IMO, is why not.

Some attorney wanting to make some billable hours put a cheap rental house in a C-corp. Client didn't like to pay for preparation of an 1120 every year for his $6k of rent receipts. When he learned of the capital gains implications of taking the house out of the corporation, he decided to leave it alone and let it be his heirs' problem.


In some states, there might be limitations on property tax that get lifted when the property changes hands. If those limits hold for corporate owners during a change in ownership, then it might be worth titling in trust/corp/LLC for that reason.
In Michigan, those limits hold for family transfers so no gain here. Attorneys and accountant should have gone over this with her if it's a factor under Maryland law.


Wait what the hell is the difference between a step up in basis on real estate vs. a step up in basis on a shares of a holding company? I've never heard of anybody worried about the distinction(hell never even heard of anybody ever even bring up the distinction). They should be valued the same.
C-corps and S-corps have different inside and outside basis.

If you own assets directly or through a partnership, the assets get a basis step-up when the owner passes away. If you own the asset through a C or S-corp and the owner passes away, the basis in the C or S-corp stock is stepped up but the basis of the assets inside the corporation is not stepped up. This is why holding RE inside of a corp is not a good idea from an income tax perspective.


That only matters if you're ever going to want to distribute the property out of the corp(I don't see why you would ever need to if it's a just 1 piece of property in 1 corporate shell). Now if you want to sell out on the step up in basis that would probably mean you sell the property + corp shell. Assuming Maryland doesn't have too much hassles in terms of maintaining let's say an LLC electing S-Corp and K1 then I don't see the big deal. If it is a hassle(annual filing fees, etc.) then yeah probably not worth it.

Thanks for all the input so far.

1) Am I understanding correctly that the only benefit to putting the property into a corporation is for liability purposes?

2) Also, the only difference between a simple gift/transfer of deed, versus the trust/owner financing options is the value at which the property is assessed at now? (If gifted, it will be appraised at whatever value mother originally got)?

Again, the intention is to keep the property and never sell (unless life throws a wrench into things).

Thanks again for all the input.

Cooz said:   Thanks for all the input so far.

1) Am I understanding correctly that the only benefit to putting the property into a corporation is for liability purposes?

2) Also, the only difference between a simple gift/transfer of deed, versus the trust/owner financing options is the value at which the property is assessed at now? (If gifted, it will be appraised at whatever value mother originally got)?

Again, the intention is to keep the property and never sell (unless life throws a wrench into things).

Thanks again for all the input.


There is one other benefit to utilizing a corporation for purposes of transferring property. The IRS agrees that minority shares are worth less than majority shares. So for purposes of determining a gift amount(assuming it matters) or an arms length transaction if you move the minority(less than 50%) first before moving the rest you can report it at a smaller value. I don't know whether that it will actually be able to benefit you since you're eventual goal is to take 100% of it which means that logical consistency would say that the remaining 51% would be valued at a higher amount if the first 49% was valued at a lower amount.

Whether it's sold or gifted it's current value.

Again go see attorney's until you find one that seems to know exactly what he's talking about.

By the way your mother is a US citizen, right?

Honestly, just have her use up a chunk of her lifetime exclusion and be done with it.

The basis in the property will become your basis fyi so make sure she has the records for what she bought it for(or what value it was when she inherited it). She'll use up part of her lifetime gift and estate exclusion. You'll both have to report it as such on your tax returns and then you can decide from there if you want to chuck it into a corp.

Cooz said:   Thanks for all the input so far.

1) Am I understanding correctly that the only benefit to putting the property into a corporation is for liability purposes?

2) Also, the only difference between a simple gift/transfer of deed, versus the trust/owner financing options is the value at which the property is assessed at now? (If gifted, it will be appraised at whatever value mother originally got)?

Again, the intention is to keep the property and never sell (unless life throws a wrench into things).

Thanks again for all the input.


1) unless having it in an entity allows you to keep a legacy property tax appraisal while transferring ownership of the entity. I think they're doing this with trusts in California, but I'm certainly no expert in CA property tax.

2) If it's sold to your wife at a discount, her basis for loss or for gain is what she paid. If it's gifted to her, her basis for gain is the value at the time of transfer (better have a licensed appraiser write it up at time of transfer) and her basis for claiming a loss is her mother's basis. Because it's a commmercial property, whatever basis wife uses when wife sells it will be net of any depreciation claimed. If it's never sold, only inherited from now on, basis means nothing.

dshibb said:   
That only matters if you're ever going to want to distribute the property out of the corp(I don't see why you would ever need to if it's a just 1 piece of property in 1 corporate shell). Now if you want to sell out on the step up in basis that would probably mean you sell the property + corp shell. Assuming Maryland doesn't have too much hassles in terms of maintaining let's say an LLC electing S-Corp and K1 then I don't see the big deal. If it is a hassle(annual filing fees, etc.) then yeah probably not worth it.


That works as long as anybody buying the property would want to keep the corporate shell.
If it's a house, sticking it in a corporation will turn off future buyers.
Commercial property, probably not a factor.

taxmantoo said:   Cooz said:   Thanks for all the input so far.

1) Am I understanding correctly that the only benefit to putting the property into a corporation is for liability purposes?

2) Also, the only difference between a simple gift/transfer of deed, versus the trust/owner financing options is the value at which the property is assessed at now? (If gifted, it will be appraised at whatever value mother originally got)?

Again, the intention is to keep the property and never sell (unless life throws a wrench into things).

Thanks again for all the input.


1) unless having it in an entity allows you to keep a legacy property tax appraisal while transferring ownership of the entity. I think they're doing this with trusts in California, but I'm certainly no expert in CA property tax.

2) If it's sold to your wife at a discount, her basis for loss or for gain is what she paid. If it's gifted to her, her basis for gain is the value at the time of transfer (better have a licensed appraiser write it up at time of transfer) and her basis for claiming a loss is her mother's basis. Because it's a commmercial property, whatever basis wife uses when wife sells it will be net of any depreciation claimed. If it's never sold, only inherited from now on, basis means nothing.

dshibb said:   
That only matters if you're ever going to want to distribute the property out of the corp(I don't see why you would ever need to if it's a just 1 piece of property in 1 corporate shell). Now if you want to sell out on the step up in basis that would probably mean you sell the property + corp shell. Assuming Maryland doesn't have too much hassles in terms of maintaining let's say an LLC electing S-Corp and K1 then I don't see the big deal. If it is a hassle(annual filing fees, etc.) then yeah probably not worth it.


That works as long as anybody buying the property would want to keep the corporate shell.
If it's a house, sticking it in a corporation will turn off future buyers.
Commercial property, probably not a factor.


1) Valuation techniques like you mentioned are basically the only other one so agreed.
2) Agreed...although it's mom not wife

3) Makes sense!

The lifetime exclusion for 2013 is $5.25 million.

If she's leaving the country, just gift it over and Fuggetaboutit.

The simplest approach without tax consequence is just to gift it and account it under the lifetime estate basic exclusion. The lifetime exclusion limit is a bit over $5 million.

If your mom has more than $5 millions net worth, she can later put the amount over the lifetime exclusion limit into the various forms of trust to avoid the estate tax.

The suggestions that you have received are quite good. Actually, there are different options to deal with this situation and each one of them has suggested what they liked. Your wife’s mother can simply gift the whole property to her and leave the country. If the property value is within the lifetime exemption limit for gifts taxes, then your wife’s mother won’t be liable for paying any taxes to the IRS.

I have a bit more information.

First though, thank you everyone for your help and advice. It really helped guide my research and ask the right questions.

So we decided to go to a title company and below is the list of fees they want to charge us. Originally they said it was only going to be approximately $450 to do the thing (including the writing of the deed by one of their lawyers). Unfortunately they now came back with the information below:

Because this is Baltimore County there will be additional Transfer and Recordation tax as Follows:

Recording Fee $60
Lien Certificate $50
County Transfer $1,488
State Transfer $744
County Recordation $745
Deed Prep $300
Delivery Fee $50

Total $3,437



Now, just based on the names of the fees I suppose it all sounds legitimate, but again, I'd appreciate any insight you guys have.

Thanks again!



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