5 Estate Planning Secrets of Real Estate Investors

So many people are struggling just to make ends meet that they do not stop to think about their future pertaining to investments and estate planning. However, a lot of people rely on real estate investments as a part of their income. Hence, estate planning plays a key role in tax advantages. Investing in real estate provides for capital gains while at the same time lowering tax liabilities.

Keep in mind that factors such as mortgage repayment, capital gains, estate equalization and real estate fluctuations will create a need for liquidation. As well, spousal rollers are tax deferred until the death of the remaining spouse or sale of the investment property. It is also important to remember that lifetime capital gains via real estate investments are not exempt from taxes.

Following are five tips to help you get the most for your real estate investments.

1. Investments in Real Estate
Distribution, sale, or transfer of property may result in either capital loss or gain dependent upon the market value and condition of the properly in question. If the property is a rental property and the market value exceeds the capital cost, taxes are payable on the recaptured value of that property. However, it can result in a loss if the value is lower than the capital cost which can then be deducted against other gains.

Those real estate properties that are financially successful should then be transferred to surviving family members or the designated beneficiary of the estate. Keep in mind that any taxable liquidity must also be funded in advance. This is to ensure that those taking control of the said property do not have any issues in the future.

It is recommended to create a holding company when investing in commercial properties to assist in split income situations. Additionally, it is wise to go through a family trust to purchase shares of the holding company.

2. Principal Residence
Capital gains acquired from the sale or transfer of a principal residence are not subject to taxes. It should be pointed out, though an investor is only allowed to obtain one principal residence per family unit. Those properties that are held in joint tenancy shall remain with the remaining spouse. Upon their death the last will and testament dictates the future dispersion of the property in question.

To ensure that the total cost of your property tax deferral is covered, you need to have adequate liquidity upon execution of your estate plan. This aids in lowering the repayment for the beneficiary upon transferal of the estate.

If minor children are not part of the estate plan, it is a good idea to use your assets as a replacement to the interest via estate equalization. Keep in mind that you need to keep interpersonal conflicts of property liquidation to maintain harmony within the family unit.

3. Build a Solid Fiscal Foundation for Your Family
Owning a rental property is a great way to earn long-term benefits as opposed to wholesale real estate, property rehab and flipping property. Even with the maintenance costs on depreciating properties, it is a lucrative and easy way to earn a constant cash flow. This money is tax advantaged until you own the property in full. Also, you will not incur any tax liabilities.

You can lower your taxes via a 1031 exchange. This allows your capital gains to be transferred to a new property. Buying, fixing and selling a property is also another way to earn money without incurring tax liabilities. Before venturing into any of the aforementioned options, you should discuss your financial situation with a CIA to determine which option is best for you.

4. Invest in Recreational Property
Tax on the disposition of recreational property is deferred only if the property in question is a joint tenant property. Otherwise, capital gains are taxed. However, if the property is left to the surviving spouse, taxes will incur upon the transfer of property.

If the surviving spouse inherited the property outright and then remarries, the property could then end up in the hands of an unwanted beneficiary. To avoid this, it is advisable to create a spousal trust which can also prevent capital gains tax. This allows the testator to then distribute the property when the remaining spouse passes away.

5. How to Avoid Liquidity Crisis
Upon the death of a real estate investor, the capital gains that arise out of the dispersion of property can often be a lot of red tape for the family of the decreased. This is due to the fact that property is not as easy to sell off as other assets. Thus, it is worthwhile to solve any liquidity issues prior to the event of your death.

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