Pitfalls of Intra-Family Real Estate Transactions – Part One

INTRO: Estate planning and real estate are the areas upon which my law practice is focused. As such, I periodically advise and assist clients with intra-family real estate transactions. These real estate transactions frequently involve overlapping estate planning considerations, and often require amending the client’s estate planning documents (including, primarily, their Living Trusts). I have seen too many of these transactions cause big problems when people proceed without comprehensive legal and/or tax advice. So, I thought I’d use this article to outline some of the important potential pitfalls – many of which are not intuitive or apparent to laypeople.

Many clients ask me to advise them about how to best structure a gift (or sale) to a loved one of all or a fractional interest in real estate. I enjoy helping clients strategize about, structure, document and implement such transactions.

All too often, I hear about an intra-family gift or sale after it has already been completed. The owners sometime tell me they handled it themselves because it was “very straightforward.” Unfortunately, when I’m consulted “after the fact,” I frequently need to apprise such clients that they made costly strategic and/or procedural errors.

Handling an intra-family real estate transaction without obtaining professional legal and tax advice is perilous. Even seemingly simple arrangements can have dramatic implications, many of which are not apparent to laypeople.

Here, I’m able to only scratch the surface about common pitfalls. So, this piece is intended to serve as an overview of some of the many and varied components in this complex arena. In doing so, I hope that the reader will embrace the importance of obtaining comprehensive professional advice before entering into any intra-family real estate transaction.

These transactions (which include the seemingly innocuous act of “adding someone to the title” of your property) may involve some or all of these important considerations, among others:

Federal Gift Tax & Estate Tax – Gifting property of a value that exceeds certain threshold amounts can trigger tax reporting requirements. One can unwittingly use portions of one’s Federal Gift Tax and Estate Tax exemptions in an inefficient manner, and thus negatively affect potential future tax liability (under this specialized and complicated federal tax system).

Income Tax – A gift of a full or partial interest in a property can have income tax consequences. Many elderly people gift real property to their children without understanding the future income tax consequences for the children (when the children later sell the property). Many times, these income tax ramifications are such that an elder is better advised to retain the property until his or her death. Also, if the elderly person needs funds to maintain or enhance his or her lifestyle, alternative strategies may make more sense than gifting or selling (such as renting out the property; taking out a loan; or obtaining a reverse mortgage).

Property Tax – Valuable property tax reassessment exclusions may apply, including those available for many parent-child real estate transfers. One should be advised about whether the particular transaction renders it eligible for reassessment exclusion, and certain forms must be timely completed and filed with the Assessor. If these rules and procedures are not strictly followed, the benefit may be forfeited.

PART TWO: More transaction advice from Rob in Pitfalls of Intra-Family Real Estate Transactions – Part Two.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE LEGAL SERVICES: Need to find an estate planning attorney in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on Revocable Living Trust, Wills, Durable Power of Attorney, Advance Health Care Directive, Special Needs Trusts, and Irrevocable Trusts & Advanced Estate Planning, including Irrevocable Life Insurance Trust (ILIT), Qualified Personal Residence Trust (QPRT), Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT), “Crummey Trust”, and various types of Charitable Trusts.