DEAR BOB: My husband died without a will (suicide). He owned 10 rental properties on which I am now paying the mortgages. I want to sell or transfer them to my son-in-law. My concern is the capital gains tax. I want to sell the properties so I can put money in the bank. Each property is worth only about $75,000, but they have positive cash flow. I just am not the landlord-type person. I’m too old for this and I need to have something set aside for retirement. My late husband didn’t have any life insurance. Any suggestions? –Marie McG.
DEAR MARIE: I’m sorry to learn of your husband’s death. However, there probably will be no federal estate tax, gift tax or state inheritance tax due.
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Because your husband died without holding his assets in a revocable living trust to avoid probate, and he left a substantial estate, it will be necessary to probate those 10 rental properties through the local probate court, thus involving costs and delays. Please consult a local probate attorney.
Discuss the probate fees up front. Some probate attorneys will tell you they must charge the fees set by state probate law. That is not true.
Those statutory fees are the maximum allowed. But attorney fees are negotiable (just like real estate sales commissions). Unless there are complications for your late husband’s estate, as his surviving wife you should be entitled under the state law of intestate succession to inherit all his assets.
If the first probate attorney you contact refuses to “adjust” his/her fees to make them reasonable, shop around. I’m sure there are several good probate attorneys in your county. Probate work is not very difficult.
After opening probate of your late husband’s estate, unless there are problems, the judge will award the assets to you as the closest surviving relative. Until that happens, you can’t give or sell the properties to your son-in-law.
The good new is when you receive title to your late husband’s assets, you will receive them with a new “stepped-up basis” to market value as of the date of death. The result is no capital gain tax if you then sell the properties at the same valuation.
However, if you gift those properties to your son-in-law, you will have to fill out a federal gift-tax return because the total gift exceeds your $12,000 annual tax-free gift-tax exemption per donee. No gift tax will be due if your total gifts are below $1 million and you haven’t given away other non-exempt lifetime gifts above this amount.
Since you say you need retirement income, you can sell the properties to your son-in-law and carry back the mortgages to make the financing easy and profitable for you. Only the interest income you receive on the carryback mortgages will be taxed in future years. For details, please consult your tax adviser.
WILL HEIRS TAKE OVER CURRENT PROPERTY-TAX BASIS?
DEAR BOB: When my children inherit my home and income property, will they also keep my property-tax basis or will the properties be reassessed to market value after my death? –David L.
DEAR DAVID: Your answer depends on the state where your property is located.
For example, if the property is located in California, thanks to famous Proposition 13, your children who inherit your real estate will be able to keep your property tax basis on up to $1 million of assets.
Each state has different rules for reassessment upon inheritance depending on the heir’s relationship to the deceased. For full details, please consult the local tax assessor or property tax collector.
HOW MUCH RENT SHOULD A FOUR-PLEX PRODUCE?
DEAR BOB: I am a new real estate investor. I am considering buying a four-plex residential rental with an asking price of $259,000. How much should the rents be for this investment to pay off? –Jason N.
DEAR JASON: The exact answer depends on the amount of your cash down payment and the mortgage payments.
As a very general rule, if the total monthly rents are about 1 percent of the property’s market value, you have a “good deal.”
To illustrate, with a $259,000 purchase price (of course, never pay full asking price), the property should produce gross rent about $2,590 per month.
The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar in a Buyer’s Market,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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