When it comes to transferring commercial real estate to your heirs, the tax implications can be significant. The large amount of taxes and the complex planning make it difficult to understand what the right move really is. At Whittaker CPAs, we know that preserving your family’s wealth and minimizing tax liabilities are top priorities, especially with high-value assets like commercial property. Here’s what you need to know to pass on your property strategically and efficiently.
1. Understand the Federal Estate Tax
The federal estate tax applies to estates valued above a certain exemption amount. For 2024, this exemption is set at $13.61 million per individual. If the combined value of your estate exceeds this amount, the excess could be taxed up to 40%. Read more about the basics of estate tax here.
By knowing where you stand in relation to the exemption threshold, you can better plan your estate to minimize tax liability. High-net-worth individuals may benefit from strategic tax planning. Some ways to do this are gifting during their lifetime or establishing trusts to control the timing and distribution of assets.
2. Benefit from the Stepped-Up Basis
The “stepped-up basis” is a valuable provision for your heirs. When real estate is inherited, the tax basis is adjusted to the property’s fair market value at the time of your passing. This adjustment means that if your heirs decide to sell the property, they’ll only pay capital gains tax on the appreciation since inheritance. This can reduce their tax burden considerably and help preserve family wealth.
3. Consider Gift Tax Implications
Some individuals look to reduce estate taxes by gifting property during their lifetime. However, gifting commercial real estate can bring about gift taxes. For 2024, the IRS allows an annual gift exclusion of $17,000 per recipient. If you exceed this amount, it can count against your lifetime estate and gift tax exemption, reducing the total exemption amount available upon your death.
Gift tax planning is essential if you’re looking to pass down commercial real estate through lifetime transfers. It is important to work with a tax professional to maximizing your gifting abilities while minimizing tax liability.
4. Be Aware of Depreciation Recapture Rules
Depreciation deductions taken over the life of a commercial property can complicate matters when transferring ownership. While inherited property typically benefits from the stepped-up basis and avoids depreciation recapture, property that is gifted retains its original tax basis and may be subject to depreciation recapture when sold.
If depreciation deductions have been taken on the property, it’s crucial to discuss your options with an accountant to ensure your heirs won’t face an unexpected tax bill should they decide to sell the property.
5. Consider a Trust for Seamless Transfer
Establishing a trust can offer tax advantages and added flexibility for transferring real estate. Trusts can be designed to help bypass probate, offer privacy, and potentially reduce estate taxes. By placing the property in a trust, you can control the timing and manner of asset distribution.
Final Thoughts: Work with a CPA to Protect Your Family’s Wealth
The tax laws around estate planning are complex and ever-evolving. Partnering with a CPA can help you develop a personalized strategy that aligns with your long-term goals while keeping tax implications in check. At Whittaker CPAs, we’re here to guide you through each step of estate planning for your commercial real estate, helping ensure a seamless transfer to your heirs with minimized tax exposure.
Want to learn more about estate tax planning for high-value properties? Contact us at Whittaker CPAs to discuss how we can help you plan for the future and protect your legacy.
