Thinking about gifting real estate to your children or to charity?
Deni and Brian talk through the tax consequences of giving property, both while you’re alive or as part of your last will to transfer in your estate plan.
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Brian: Happy holidays, Brian Davis and Dennis, if we hear from Spark Rental, we are super excited to be with you today and we’re going to talk today about giving because it is that kind of season, right? So last week we talked about six tax moves to make before the end of 2021. And this week we are sticking with that theme of taxes, but we’re talking about the tax implications of giving real estate to either your children or your favorite charities. So, on that note, you know, as we go through this, chime in with your questions and comments, you know, this is an interactive live broadcast. This is not just a polished prerecorded podcast, like most of them out there, it’s a little more raw, a little less scripted. We do want to hear from you. And that’s why we do it. It’s more interactive. So, on that note, Deni, let’s jump in and let’s talk about giving real estate to your children. yeah, let’s start with the basics of terminology here. What is your cost basis in real estate?
Deni: Your cost basis is the price on the person originally bought the property for. So then there’s a step-up cost basis, and that is the value at the time of the person who purchased the property’s debt.
Brian: If they die.
Deni: Right. Right.
Brian: Giving property to your children. There are two scenarios here. One, you could give them a property today, you know, while you’re still alive, which has different tax consequences from leaving your property in your will to your children for after you die. And the step-up in that cost basis that applies if you leave a property in your will to your children to receive after you die. So, the cost basis resets from what you paid for the property to the value of the property at the time of your death. And that’s something that some people in Congress are looking to get rid of that step up in cost basis. You know, the reset of the cost basis at the time of death because they want to tax more of those inheritances, right? So, but that does not happen if you give someone a property while you are still alive. The cost basis is still whatever you paid for the property. So, if you bought the property back in 1990 for $100000 and today it’s worth a million dollars. The cost basis is one hundred thousand dollars, and you have nine hundred thousand in gains on that. Or at least you have nine thousand dollars in equity gained equity. But that doesn’t become a realized gain until you sell the property, at which time you would pay taxes on that gain in value.
Deni: Right. And those are estate taxes. There are gift taxes too. It’s as though that’s a whole other issue, so you have to be really careful and be very fastidious and in making sure how you plot this out. You know, so that you can save your children money and yourself with all of this because. It can even be different in your community, property states and everything else, so make sure that you know what you’re doing and don’t assume.
Brian: And make sure you speak with an accountant or a tax lawyer about this because it’s like then you just said it does get complicated quickly. But whether you are alive or dead when you give the property has a big impact on the tax consequences if you live there. Gift taxes apply. If you are dead, then estate taxes apply, right? And there’s a big exemption for estate taxes. I think it’s 5.7 Seven million dollars or something like that. Yeah, we should know that.
Deni: We probably should. But you know what? They change this stuff. Like every year we’re going to be talking about how to give to charities. And I think last year, and I think this year to one hundred percent. Of your AGI, is it adjusted gross income can be used for you can pretty much give all your money away?
Brian: Right? Well, let’s before we move on to charitable giving, let’s talk about one or two more details about giving property to your children and the tax consequences of it and other rules. So, Deni before this show, you and I were actually talking about a little bit more of an obscure rule that’s important to know here for older adults, and that’s the Medicare rule. So, tell us a little bit about how that works. If you are an older adult, you’re thinking about giving away all your worldly possessions, including your real estate to your grown children, and then applying for Medicare subsidies. How does that work?
Deni: Well, Medicare will look back five years, so if you a lot of people have really quick thought, oh my goodness, I’m probably going to need long-term care. I’m going to sell my stuff right now and then apply. Well, it doesn’t work that way. You have to kind of plan it out, so you have to. Either gift, give or sell your properties at least five years in advance because they will look back.
Brian: Right, so otherwise Medicare will consider those assets even though you’ve sold them or given them away, they will still consider them as part of your assets and net worth when they’re reviewing your application for financial aid and assistance with long-term care coverage or long-term care support.
Deni: And let’s face it, a stay in a nursing facility that can eat up. Yes, that can eat up in us, you know everything, basically.
Brian: Yeah. So just to tie this all back together. So, if you inherit a property from your parents who have died, you know, as part of their estate, the cost basis resets to the value at the time of their death. And if you were to sell that property immediately, then you don’t know any capital gains taxes on it or any income taxes on it. Assuming that the estate was below. That exempts limit, which is pretty significant. It’s over $5 million as of right now, anyway. Constantly changing. Now, if you hold on to that property for the next few years, for example, and more equity builds in that property, then when you go to sell, you will have to pay capital gains taxes on any new equity that has accrued in that property since your parents died. So, keep that in mind.
Deni: Now, jerry Warner has said, we haven’t mentioned trusts instead of gifting. Why not? Because they’re very complicated, but that is another avenue to explore. And a lot, you know, it makes sense to do it that way, but with that, you want to get an attorney, somebody I know we have talked here with Sarge Grubbs. He handles things like that. And if anybody wants his contact information, just reach out to us. We’ll make sure you get it. But trusts are complicated. They can be a little expensive to create.
Brian: And there are many different types of trusts. Further, complicate matters.
Deni: Exactly. But it is not a bad way to handle, especially giving it to your kids.
Brian: Yeah, they’re useful in estate planning, both in minimizing the probate process for your children, but also for designating assets to continue generating wealth for many decades to come for your children, grandchildren, and great-grandchildren. So, yeah, trust can be very useful, and they can have some tax advantages if you structure them properly. And again, that’s where an attorney comes in. Don’t try to do it yourself with trusts. That is definitely an area where diying is not going to work out so well for you. Go get an attorney to help you with that.
Deni: And you know, if you have enough assets, you want to be careful about doing any of this yourself because it can get quite complicated.
Brian: Yeah, and if you’re not careful, you can run afoul of the taxman and end up owing more than you necessarily have to.
Deni: Right. Or your children could.
Brian: And Jerry asks, does the new basis price apply to investment properties, or is it limited to personal residences? So, my understanding Deni and correct me if I’m wrong, is that that applies to all properties, not just primary residences. And again, you know, this all falls under the umbrella of the estate tax exemption. So, you know, the first X number of millions of dollars’ worth of your estate is estate tax free for your heirs. And Deni just put a link there in the comments to an article that we have this all about how to minimize your capital gains taxes on real estate. You know, both primary residences and also investment properties. Then is there anything you wanted to add on to what I just said there?
Deni: I just can’t drive it home, as you can see at my twisted tongue. You must get professionals for You know you want to invest. That’s the idea. And you want to invest to make money, and you maybe want to invest to provide, you know, something for your children. But you also want to be smart about planning. And for that reason, you want to make sure and get all of your top financial planners and estate planners on board.
Brian: All right, let’s switch gears, let’s talk about giving to charity here as opposed to giving to your children. So, Deni tell us about charitable contributions of, you know, not just cash but of real estate to nonprofit organizations.
Deni: Well, you can. You can gift real estate to charities, and I know that there have been I’ve seen it done before. You know, we’re even churches will get a building. Somebody will give them a building and they’ll use it for a church. Now it’s different now. You can deduct up to one hundred percent right now. It used to be 50 percent, but 100 percent of your adjusted gross income, I believe. But there are some
Brian: Temporary rule during the pandemic or is that a permanent change in the tax law?
Deni: I’ve been trying to find if this is going to continue on right now, it was in 2020. They haven’t. I haven’t been able to read anything about what’s going to happen for 2021.
Brian: They would have announced that by now.
Deni: Well, yeah, and they may have, and I just couldn’t see it out there. So, it tells me that it’s probably going to continue,
Brian: But keep your special exception for 2020.
Deni: Yes. But now I know that another special.
Brian: Well, so I mean, to cut you off, they’re sorry.
Deni: Deni Oh no, I just we all just have to be very, very. Going on right now because they change things so quickly, and it’s so you got to be watchful. But I haven’t seen where it’s going to change from that hundred percent yet.
Brian: Yeah, and there have been a couple of those exceptions to the rules made during the pandemic. So, for example, you are allowed to claim a certain amount of money as a charitable contribution during the pandemic, even if you take the standard deduction rather than itemizing your deductions. I believe it’s three hundred dollars and that was initially just for 2020, and then I believe they extended it to 2021, where you can take up to three hundred dollars in. You can deduct up to $300 in charitable contributions this year, even if you take the standard deduction cap, which is not how it has been historically. Historically, you can only deduct charitable contributions if you itemize your deductions rather than taking the standard deduction, which of course most people do nowadays because it has been, it was raised so much higher by the Tax Cuts and Jobs Act of 2017.
Deni: Right, and most real estate investors, I would think itemize, but again, not all, but a lot.
Brian: Well, and keep in mind that with investment properties, you don’t have to itemize your deductions in order to take deductions for your rental properties, your investment properties, because those fall in a different schedule. That’s those expenses are on your business income, your rental income from your properties. So, you do. You can take the standard deduction and still deduct your expenses for your rental properties. So just bear that in mind. We’ll talk more about rental property deductions in February when everyone scrambling to do their taxes. But what about properties with mortgages that you give to nonprofit organizations, Deni?
Deni: Well, if a charity is willing to accept that, then you have to realize that you don’t get full value. I mean, obviously whatever mortgage is on there is not being donated. So, I mean, you have to take that into consideration.
Brian: Equity in the property that you’re effectively donating.
Deni: Right. So, and not all charities are going to accept that they have to be pretty savvy and have a pretty good, you know, financial background in order to even do something like that.
Brian: Yeah. Only your larger charities can typically accept real estate as a donation.
Deni: A person can pre give Jerry again, thank you, Jerry, by the way, for your questions and your comments. A person can give 2022 this year and itemized for 2021 and then take the standard in 2022 and save even more tax. Wow.
Brian: It’s a great tip.
Deni: Yeah, it is. So again, these are the reasons why talk to Jerry. Just kidding. No, these are the reasons why research has to be continually done because things are so different and changing constantly. But anyway. There are different circumstances where you would give a, you know, that is advantageous for you to give a property or but you have to have in order to give a property for charity. One is that it has to be held for more than one year and it should be debt-free. I know we talked about it having a mortgage before, but generally, if you’re going to donate property, it should be debt-free.
Brian: So, Deni. Are you saying you’re saying that you cannot donate property to charity if you have owned them for less than one year?
Deni: Yes. The property has to be held for more than one year. And you are willing to transfer the property irrevocably to either a donor-advised fund or whatever public charity you’re choosing. Which you negotiate the sale price and everything else, so. All in all, again, whether you’re giving it to your kids, whether you’re giving it to a charity, you really, really, really have to talk to a financial expert. I mentioned Serge Grubbs, but you also want to maybe talk to an accountant who knows your circumstances. You just don’t want to take these things lightly. You want to plan them out. You certainly don’t want to be all of a sudden. And, you know, God forbid, something happens. And you have properties that are sitting there, and your kids have to deal with it, and you’d be surprised how often that happens. People don’t plan. And then the kids are not only left with probate and everything else but also taxes and capital gains and gift taxes and whatnot.
Brian: So just to recap, if you take the standard deduction this year, you can write off you can deduct up to three hundred dollars of charitable donations if you give a piece of property. If you donate a piece of property to a nonprofit, you’re probably going to want to itemize your deductions so that you can deduct the equity that you had in that property from your tax return. Now, Deni are there any limits on the amount that you can deduct for charitable donations?
Deni: I haven’t seen any limits just that you have unless you’re donating a mortgaged property, but overall, you just want to make sure that you have a decent that you own it outright.
Brian: Now that being said, even though there aren’t any specified limits on that deduction, if you do claim a very large charitable donation deduction that is an audit trigger with the IRS. So, you may get a little tap at the door from the IRS if you claim a very large charitable donation as a deduction on your tax return. So just bear that in mind. And once again, it helps if your accountant prepares your tax return for you in these scenarios so that they can talk to the IRS about that if they come a knocking with questions rather than you having to explain your tax return.
Deni: I think the mentality sometimes going to throw this out there, it’s Robert Kiyosaki that says you should build a team, you know, and the how important it is to do that because and this is precisely why because it’s complicated these things and you don’t want to do. We have a do-it-yourself, society. Watch YouTube, do it yourself. But there are some things where you have to build a team.
Brian: You know, when it comes to taxes and the law, you do need expert help. All right. Deni any final comments that you want to make here to tie this all together before we call this episode complete?
Deni: Well, we can’t call this episode complete because we are announcing a winner today. I don’t know if everybody that’s tuning in right now knows that we have been offering a one year right one-year prop stream subscription
Brian: Or paid membership with prop stream $1200 value,
Deni: Which is pretty good and it’s a really good resource for real estate investors.
Brian: Fantastic software.
Deni: So, we asked everybody to fill out a survey. We got a pretty good response. And Tara spun the wheel. You all get to see that on Facebook later.
Brian: But the video of her spinning the virtual wheel to choose the words exactly.
Deni: But we will announce the winner and the winner is Lori Dawson. So, congratulations, Laurie, and contact Tara. And she has your email and everything. But we will set that up for you and you’ll be notified when it all goes through, and you can start using your prop stream.
Brian: All right, guys, on that note, happy Tuesday. Happy holidays. Merry Christmas, and we will see you guys’ next week for the last broadcast of 2021.
Deni: Yes, so everybody be safe and merry Christmas.
Brian: Have a good one, guys. Talk to you soon. Bye-bye.