Steep Inheritance Taxes Imposed
High Taxes on Inherited or Gifted Rental Properties: A New Deferral Option Offered
Amidst the ongoing housing crisis, the long-term increase in property value often results in high tax bills when properties are inherited or gifted, even within family circles. For instance, inheriting a rental property with multiple units in a major city may force those without sufficient financial resources to sell the property to pay the inheritance tax. This was not a concern 20 years ago as a single-family home in a city could be transferred tax-free to the surviving spouse. However, the current inheritance or gift tax allowance only covers, at best, a two-bedroom apartment in a mid- to high-end location.
Fortunately, a deferral option is now available for those in need. Recipients of gifts or inheritances can defer the payment of the tax for up to 10 years when they have to sell the property to meet the tax obligations. This option applies to both self-occupied and rental properties, and no deferral interest is charged in the case of an inheritance. The change is regulated in paragraph 28, section 3 of the Inheritance Tax Act.
When faced with high-value rental properties and limited liquidity, there are several tax-efficient options to consider. One option is to transfer half of the property to the other spouse, thus doubling the gift tax allowances when the property is subsequently transferred to the next generation. Another strategy includes submitting expert reports from sworn or certified experts to potentially reduce the tax office's valuation methods.
In certain situations, the use of advanced estate planning strategies can be beneficial. These may include grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), qualified personal residence trusts (QPRTs), irrevocable split-interest trusts, family limited partnerships (FLPs), limited liability companies (LLCs), installment sales, intra-family loans, donor-advised funds (DAFs), and charitable remainder trusts (CRTs. However, these strategies should be tailored to individual circumstances and goals and implemented with the guidance of estate planning and tax professionals.
The current tax law provisions are set to expire, making planning for potential changes in estate and gift tax laws crucial. It is advisable to seek the counsel of estate planning and tax professionals before making any decisions involving high-value rental properties and inheritances.
- Within the context of wealth management, it's essential for individuals receiving high-value rental properties, especially those without substantial financial resources, to be aware of tax-efficient options to manage potential inheritance or gift taxes.
- In the realm of personal finance and business, advanced estate planning strategies such as GRATs, IDGTs, QPRTs, FLPs, LLCs, and CRTs can be beneficial for those dealing with high-value rental properties, to mitigate inheritance or gift taxes and ensure a smooth transfer to the next generation.
