Legal Question in Real Estate Law in California
Exchange
Dad (86 yr. old) has a property he is going to sell that he would realize a sizeable profit. He built this duplex in '76 and has rented it ever since. He is sole owner on the deed of trust in his family living will estate. He is leaving it to me his daughter. I also have power of attorney and am the executor. The question: should he transfer the deed ownership via a conveyance now to me thereby his not having to pay a large capital gain fee?
Coupled with this question...I am selling two properties that I would like to do an exchange with another property. Would I be able to use all three sold properties (assuming they sell close together) and do an exchange with one other property?
I understand ok, investment property to investment property. No problem. Also understand one sale can be exchanged for up to 3. But can the reverse be true? That is the question. (And the needed advise on Dad's prop. deed?)
Thank you for a prompt answer.
I have asked you question in past year and had to wait so long. I hope this will be quicker. Thank you for your advise.
CDStavrum
3 Answers from Attorneys
Re: Exchange
Regarding your father's property, it might be wiser for him to keep the property, because otherwise you will be saddled with his basis.
He could do an exchange for another property, and keep it in the trust. Depending on the size of his estate and the terms of the trust, the basis of his property could be entitled to a stepped up basis at the time of his death, meaning no capital gains.
You really need to sit down with someone to go over everything. What you are looking at is way beyond the scope of this site.
Re: Exchange
Although it appears from your facts that the duplex is in a Living (Family, Inter Vivos) Trust.That isn't entirely clear. If there is a Living Trust (don't confuse with a Living Will) that would be the best place to keep the duplex. On a property exchange, any number of properties may be exchanged for any number of properties. Characterization of the property (commercial, industrial, residential) isn't important. Just as long as everything in the exchange is Real Property. You can exchange two farms for a residence if you want a tax free transaction. As an acquantance of mine did. The best way to hold title to this property is a Living Trust. Upon your Father's death you'll then take the property at its stepped up value and not suffer any long term capital gains tax. Any property that your Father resides in may be sold tax free since he's over the age of 55. You Father may also give you $10,000.00 gift each year tax free. This of course is the basis of these Family Limited Partnerships. In which the heirs are limited partners, and receive a $10,000.00 gift of an interest in the property each year. Since these are limited partnership the $10,000.00 interest might be worth as much as $30,000.00. So do some thinking before you jump. It would be easier to keep the Trust funded and you be the successor trustee. So consider taking over from you Dad now (if he's the trustee), the job of the successor trustee.
Re: Exchange
Inherited property receives a step-up in basis, but property given during one's lifetime does not, so inheritance is better than a gift. If he faces estate taxes (estate larger than $1,000,000), there are some ways to reduce or eliminate them. He should see an attorney about planning, and whether he needs more than just the living trust.
Regarding the exchange, exchanging two (or three) for one property would work, as long as the rest of the 1031 exchange rules are followed.
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