Ep 185: Real Estate Inheritance - More Knowledge, More Wealth

  📍 Good day. This is Gabriel Shane, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. My goal is to give you the knowledge you need to increase your wealth Now to the listener, you can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning.

Our phone number is (855) 963-2526. That's 8 5 5 96. Like the bird, or visit our website@falconwealthplanning.com. That's f. wp.com for sure, and if you have a question that you want answered on this show, please feel free to send your question to radio falcon wp.com. That's radio@falconwp.com. Now folks, I am the president of Falcon Wealth Planning.

We are a. Fee only non-commissioned true fiduciary registered investment advisory firm. Folks, we can help people all across the country, so feel free to give us a call. We would love to help give you a personal confidential assessment to help relate this show to your specific situation. Folks, we are offering one to two meetings, one to two hours of our time.

Folks at no cost. Give us a call. We would love to help. Our phone number is (855) 963-2526. That's 8 5 5 96 f. Like the bird, we can help answer those questions that you may have. Whether it's a question of real estate taxes, insurance, estate planning, social security, cash flow analysis, business planning, folks, you name it.

Anything that involves a dollar sign we can help with, which is why we're offering this free financial assessment. We would love to help. So today I got, uh, excuse me, earlier this week, I got a. Discussing certain aspects of personal finance. Just a question that we had and I wanted to dis go over it with you, such as the question that we got over.

Now. This is Katie from Corona that was asking this question. So Katie from Corona, California. Was asking a question about real estate. Now I'm going to, uh, swap the question around a little bit, but, uh, to answer other factors of it. But her direct question was if my husband wanted to put the house in just his name and the kid's name.

Okay. Is that a good idea now That, is that, that. Very difficult question to ask because there's so many follow up questions I have to ask. Like, why would you not be on it? Is it your first marriage? Is it second marriage? Uh, are you on any government assistance? Do you have any tax issues? Do you have any health issues?

So there's a lot more questions, but really that opened up a fantastic Pandora box of what if you were to do that. Does it make sense for you? Now, I, I want to go into details of the why behind it, because here's. Let's just say now, it, it depends on where you live, but let's just say, uh, there was a husband and wife and they own a property and they title the property together, cuz that's what happens more times than not.

So when that happens, and it doesn't matter where you live, what happens is when one of the two spouses pass away, the remaining interest of the property goes to the remaining living spouse. Simple as that. Easy-peasy. Nothing changes. Whether they have the mortgage, property, tax, whatever the case. Nothing changes.

Okay? There is no additional taxation or anything. Nothing happens. It's as simple as that. Okay, and by the way, the benefit of having a trust is a trust account avoids any type of probate. So for example, if there was no trust and the estate of the, one of the spouses who passed away, that was subject to probate, even by the way, if they have a will.

It would still go to probate. Just important to note. That's all. And so when you look at that, what does that mean for you? That means if it's in a trust, you avoid that probate. And that house goes from a joint ownership, uh, or into the trust ownership to now just a sole trustee with their living remaining spouse.

Now the question is, is what happens upon. Of that second spouse, it goes to the children or to the heirs. So for more times than not, it's children for other times than nu uh, it is the heirs. So, or it could be a non-profit, whatever the heir may be. Now we'll address the question a little bit later is what happens if you send it and put it into the one of the spouse's names and the kids?

Yet again, I have a whole bunch of reasons why that's even a thought in consideration. But long story short, we'll address that specific question here in a moment. But let's talk about the masses, which isn't the case, and that is if the home is titled into the trust and it's a normal trust and it goes to the kids, let's just say, or heirs that.

Is now sent to at whatever the fair market value is of the property. So let's just say the home was bought for a hundred thousand and it's now worth a million dollars. God willing, that home is now valued at a million dollars and that is the cost basis of whoever inherits it, whether it's kids, whether it's neighbors, whether it's family, whoever.

Okay, so which means if they were to sell that home and assuming it didn't appreciate in the period of time when you inherited it and sold it, you would pay no taxes on that. That's pretty cool. So few things to talk about. As the property gets a step up and basis, you have to note the following. There are a few triggering factors that matters to you and things that you have to make sure you or your accountant.

Does. Now, by the way folks, if you're just joining me, you're listening to Gabriel Sheen, certified financial planner and your host of more knowledge of more wealth here and every weekend talk about all important topics of personal finance. And today I just wanted to talk about if a home, uh, were to pass through to somebody through inheritance now because that home.

Uh, is now reas uh, revalued at the current valuation of the date of death. Depending on your situation and the situation of the property, that property tax may get assessed. For example, in the state of California that has a Prop 13. So this rules are because of prop 19 is if that is a rental property and you do not move.

That property gets reassessed at the property tax value. So for example, if you're in LA County and you were, uh, that property was held for let's say 30 years, and it was a hundred thousand dollars purchase price, the property tax on something like that might be 1500 to 2000 a year. Okay? Assuming prop 13 and assuming no major substantial remodels.

Now, if you were to inherit that from your parents, In a situation like that, the poem gets reassessed if you do not move in as a primary resident. And the government now gives California a $1 million exemption where you can grandfather the old rate. So in my example of that is if that million dollar. A property gets inherited and you do decide to move in, well, now you get to inherit the property tax of 1500 to $2,000, but if you don't and you maintain it, a rental, well, then it gets reassessed on the new property tax based on 1.2% property tax in the state of California and the county of Los Angeles.

That would be roughly $12,000 a year. So we'd go from argu. Less than 2000 to over $12,000. Okay. That's with no meru or anything like that. And from what Meru is, it's an additional tax that some counties and cities do for new builds. So that is important. Okay. So now you have to think about potentially a re step, a re-analysis of your property tax.

So if you thought that was a good rental, that's netting you. Money. Well, it could take six to 18 months for the government to get wind. That parents passed away and it was retitled into somebody's name, and you now have to pay a new property tax basis. That is maybe your netting of. 20, 30,000 a year. Well, if you have to pay now an extra $10,000 in property tax, you're only letting netting less than that.

You're maybe letting netting nothing or maybe only 10,000 a year. So this is, uh, just important to know. Another thing you have to take into consideration is now that the home and the people, uh, parents in this example, passed away. Whoever inherits the home now gets to red, depreciate the home at the current fair market value, which means there is a new write-off basis based on that million dollars.

A property is depreciated over 27 and a half years. My example earlier is that it was fully depreciated cuz it was owned for over 30 years. So we see a lot of people mess that up when they inherit it a property. They don't do it at the fair market value of a million dollars. They'll do it at maybe the purchase price of a hundred.

Oh. People don't realize the purchase price goes away. It doesn't matter. So when you're answering those questions in TurboTax, who cares? They don't care about that because your purchase price technically is a fair market value of what you inherited it for. So these are important concepts to understand, cuz we see a lot of people mess this up.

By the way, folks, if you have inherited property, whether they're in the state of California or outside, it's a little bit more complicated in the state of California after 2021. When they pass these new laws, prop 19, this new proposition. But even outside the state, you have to analyze, number one, is it a good property to hold?

Number two, are you taking advantage of the full tax benefits of having that? And number three, are you calculating, calculating the tax benefits of holding onto that property? Folks, we can help with this. We do these analysis all day long. Folks, we would love. To be able to help you with this and point you in the right direction, give us a call.

Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the bird where we can help analyze to see if that makes sense for you. We'll give you one to two hours, one to two meetings of our time at no cost. Folks, we would love to help because here's the thing, what sounds like a good investment could have been under your parents or whoever you inherited the property.

Old financial situation, tax situation, cost basis, situation, you have to be able to take advantage of these laws, and these laws are there to help protect you, protect the government, and quite frankly, to protect people. And in this case, this law is to make sure that it protects those who inherited the assets to make sure they're getting the proper basis in place.

And here's another thing, just because you inherited that property, you inherited that proper. Okay. At whatever the market rent was at the time, whatever the depreciation was at the time, and it was based on their purchase price. So a hundred thousand dollars property, let's say now they're getting 36,000 a year.

Well, they bought it for a hundred thousand 30 years ago. So they're probably still thinking in their head, Hey, I'm getting $36,000 a year, 3000 a month off, a hundred thousand dollars investment. That's amazing. But now, if the property's a million dollars, You have to look at it at the current equity, that's 33.6%.

36,000 divided by a million in value is 3.6%, not including the new property tax basis. And probably insurance, you're gonna have to pay. Well, property tax is 12,000. You have to subtract it from the 36,000. You have to subtract all expenses. If there's an hoa, you gotta subtract that too. If you're paying for the pool or Gardner, you gotta subtract that too.

But let's keep it simple. If you have a 33,000. Income 1000 a month at expenses. Property tax alone is at, in LA County, you're netting only 2000 a month on a million dollar property, that's 24,000 a year, which is a 2.4% return on your money. Hell, you can get a 5% treasury right now. You get what I'm saying?

This is why it's important to talk to professional folks. We would love to help. Give us a call. Our phone number is (855) 963-2526. That's 8 5 5 96 f. Like the bird, or visit our website, falcon wealth planning.com. That's falcon wp.com for sure. Folks, we're gonna go on a quick break and we'll be right back after a few words.

📍 Welcome back folks. This is Gabriel Shane, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance. And today we are talking about the simple concept of what happens to a property after, God forbid, the inevitable happens, which is when you pass away.

When you die. So we talked about the benefits of a trusses. This whole conversation was assuming you avoid. Probate. So it goes directly to just handling trust paperwork, and you're able to inherit the property, whoever the heirs are inherits it. Now, I know what you also might be thinking. Who cares when I pass away?

That's my heir's fault. They're getting a million dollar property paid off. I get it. I understand. But because I'm assuming you like and care for your kids or heirs or whoever more than the IRS or the government, you do want to have some slight care in this. So, And if they, even if the kids wanna pay for the trust, that could save them probably 20 to $30,000 of estate probate fees as well.

But let's talk about the question from Katie and Corona. And that question was, what if my husband wants to put the property in my kids' names? Am I okay? Okay, so is that okay? So let's see if that is okay. In a situation like that, the issue could be the following. Now, the first question was, how are you gonna title the property?

Now, normally when you're married, assuming you don't have a trust, it's joints with tenants to re uh, with, uh, joints with rights to survivorship. There's also community property you can do, uh, title it that way, assuming you live in a community property state like Arizona, Nevada, California, and. So my point is, in this case, they were gonna title the property between the husband and with joints, with Right Service survivorship.

The other half would be split. Amongst the two other kids. So each kid would have 25% and then dad would own 50%. Mom would have nothing. So yet again, the question in the email, I didn't have time to email back and ask for specifics, but it was a fantastic question. So thank you, Katie. But in a situation like this, first off, if it goes to the, I'm assuming it's a biological mother and they would not throw their mom out on the streets if they did.

Well, that's risk number one. Are you okay? No, you're not. Because if husband passes away, then yes, you're not okay because you are out on the streets because the home does not belong to you, belongs to the two kids. Okay? That's issue number one. Number two, let's just say now, remember the example. Over 30 years, the property was from, uh, worth a million dollars.

Okay, but it was bought for a hundred thousand. Okay? Now, if they had a 500, uh, excuse me. If they have, uh, half the home in the husband's name and then the other half of the home into the two kids' name, that means the dad has a basis of $50,000 and the kids have a basis of 50. 25,000 a piece. Now, the important part of that is if the home is worth a million today, that means the husband's share is worth 500,000 in today's value, which means when he passes away, They get a step up in cost basis and only half of the home, because that's only half of the person passed away, the other half is still living.

It's the kids. So the basis on the property for them is 500,000, which they gotta step up on and they're 50,000. So it's five 50 on a home that's worth a million. Okay? Now, the important part of that, if you already know where I'm going, is if they later sell, decide to sell the home, they now have to pay capital gains tax on $450,000.

Okay, that's substantial. There is no $250,000 capital gain exclusion. Remember, it's only for a primary resident per person. Well, this isn't a primary resident cuz mom is living at the house unless they're gonna move in with mom. You get what I'm saying? It makes it more complicated. And even then, they already have 450,000 in gains.

And remember, you're only allowed up to 500,000 in gains assuming you're married. So each kid would have to be married for that. And oh, by the way, you're not gonna have two different siblings both married with that situation. It gets complicated. You get what I'm saying? So this really opens a Pandora box of issues for this child now.

Let's take it a step further in the state of California. Remember, this is Corona, California. Half of that property will now. Get a reassessment on the property tax. So remember earlier where the property tax was $2,000, but when dad died, or in this case, husband died. Cuz Katie's asking the question, thousand is for husband, thousands for the kids.

Well, that thousand gets stepped up to 6,000. Why? Because the property tax is 1.2 for the state of California, 1.2. Well, on a million dollar home, that's 12,000 a year. Half of that, which is the husband's side is 6,000. So that gets stepped up. Then you add that to the other spouse. Uh, the kids inheritance, uh, those who inherited the property, that's a thousand.

They now get 7,000 property tax from 2000. Versus if it just would've went to the mom, it would've been better because mom would've had the a hundred percent same property tax, plus it would've got rete up the value from a MI a hundred thousand to a million. And then let's just say mom lives another 10, 20, 30 years and it's worth two, 3 million.

The kids can then get another step up in cost basis on moms when she passes away. And so if it's worth two to 3 million at that point, then they kids can inherit the property and sell it and pay no taxes. It's extremely important folks to seek professional guidance in a situation like this. Yet again, I don't understand why the husband wanted not give it to the spouse, the wife.

Uh, there could be reasons. I'm not trying to discount. Let's say they're, they're selfish. They're rude, they're old fashioned, has nothing to do with that. But it's, frankly, it's the ignorance behind the. That's the issue. By the way, folks, if you're just joining me, you're listening to Gabriel Shaheen, certified Financial Planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance.

And today we're just talking about a simple question that I received this past week about somebody that wanted to put a property. In their name and their kid's name and not their spouse's name yet again, I don't know if she's sick. I don't know the situation. I don't know if she has Iris problems. I don't know if she's about to get sued.

I don't know if she has health issues. I, there's just so much I don't know. But by the fact is when people are doing things in an ignorant fashion now, ignorant to me is people who don't understand and try to. Do things like they do understand. That's crazy. I have a saying, you can't afford to be cheap, and there's a situation like this, that's exactly what's happening.

It's somebody who's just acting cheap because in a situation this could affect, number one, the property tax. Number two, the inheritance tax. Now not inheritance like estate planning, but the inheritance of the cost basis of the home that you're gonna sell. The whole home doesn't get a step up in value.

Only half the home gets a step up in. These are substantial issues that could arise by just being ignorant of not understanding how these laws work. These laws are different, and you might have all the experience in the world in states like Texas, Arizona, New York, New Mexico, but it's different in California.

For the examples I was talking about with property tax getting reassessed with Prop 19. People just don't know what they don't know. And another thing, people are looking to also continue renting the property. Let's say that's the thing. Let's say it's in the state of California and now the property tax gets reassessed.

It went from $2,000 a year to $12,000 a year. Well, let me ask you this. If you had a million dollars. Would you have bought that property of all the properties out there? In my example earlier, if you're getting $3,000 a month and it costs you $1,000 of expenses, mostly just some property tax, you're netting $2,000 a month.

That's 24,000 a year on a million dollar property, that's 2.4% return on your money. Like what do you do? So if you had a million bucks, would you buy that specific home? I bet you I already know the answer. It's an absolutely not. Now if you wanna buy it for sentimental reasons, well it's costing you money.

It's costing you 20, 30,000 a year, assuming you can get a cap rate of 5%. And why do I say that? Well, because you can get a 5% US treasury right now, which, oh, by the way, risk free. You got nobody calling you in the middle of the night to replace a toilet. You get what I'm saying? That you gotta flood a roof.

It's just crazy that people are out there in a situation that is dealing with sub substantial money and they're not seeking professional guidance. Folks, this is why we're offering an absolutely free financial assessment to help relate this show to your specific situation, to answer the questions of what you should do to make sure you're taken advantage of.

All the proper tax laws where you are making sure you are not gonna get hit hard. When unnecessary taxes. Folks, give us a call. We help. It doesn't matter where you are across the country. We ha serve multiple states and frankly, we can help anywhere you are in the country. Folks, we're offering one to two hours, one to two meetings of our time.

Folks at no cost. Give us a call. We would love to help. Our phone number is eight five five nine six. 25 26. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for sure. We can help answer these questions for you to really make sure that you can be on the right track and avoid these common mistakes, because once you make these mistakes, they're extremely difficult to.

And each state is different. This is extremely important. If you. Property in multiple states, you wanna make sure that you are not making mistakes that are costly as you can see in this example, without knowing the full situation, assuming there was quite frankly no reason to not put the spouse, the wife on the title, then you just cost yourself tens of thousands, if not hundreds of thousands of dollars between property tax reassessment and your kids having to.

Property, uh, excuse me, capital gains tax on if they were to eventually sell that property. I see it far too often, folks. I have a saying, you can't afford to be cheap. And you just gotta make sure you talk to a professional who can help. Folks, that was a fast, fast show. I want to thank you for tuning in with me this weekend.

You can always reach out to myself or any one of our colleagues here at Falcon Wealth Planning. Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short. And if you have any, Okay. You wanna make sure we can answer from this show?

Just please send an email to radio falcon wp.com. That's radio@falconwp.com. We'll be happy to answer your question on air. No need to give us, uh, your personal situation if it's an audio clip. We had a couple people do that to their first name, last name, just. Your first name and where you're from and ask the question, we'll be happy to help answer that on air.

Folks, we want you to enjoy your weekend. Have a great week and God bless.