Incorporate two rental properties with children

[BillNOVA]

Would there be any benefit to, or problems, with incorporating the two rental properties I have, with my two adult children

 

[emerytura]

This very timely question. Unfortunately I do not have answer for that but we are contemplating to do the same. We own side by side duplex and we are not sure what will be the best approach. We plan to move to Europe for 2 or 3 years and we need to decide if we should rent it to our grown kids in exchange for paying taxes, and regular maintance and upkeep of the property, or we should keep tenents on both sides, and hire property manager to take care the rest. Our sons will one day inherit this property. Hopefully others that have rental property can come up with good ideas.

 

[calmloki]

We gifted a property last year - the gift counts against your lifetime gift exclusion for taxes. Gets some assets transferred earlier in the recipient's life, when it can really make a difference (we saw a 68 YO retired and comfortable person get a monetary gift from his 90+YO father - response was why not give when I really needed it and could have made the gift work?). Also removes the parent/child dynamic relationship from the partnership/incorporation - it is theirs to succeed or fail with and to run as they choose.

 

[papadad111]

We are considering to gift or sell a duplex- half to each of our kids when they turn 18.

Allow them to use the rental income to cover college living expenses.

Allow them to pay taxes on the income (presumably lower tax rate) and

Give them responsibility of ownership and learning to manage all that goes with it.

Debate is whether or not gifting versus selling/ carrying the note makes more sense - we would sell at arms length but then likely gift them cash annually over 3-5 years which they would then turn around and use to pay off the note). That would avoid exceeding the annual gift limits for DW and me individually.

Will watch this thread.

 

[Taxman59]

First rule in real estate is don't incorporate real estate. Use an LLC. The tax costs of getting the sales proceeds out of a corporation is exorbitant. An LLC will gif much the same liability protection without the tax headaches.
An LLC will allow you to transfer ownership of the LLC units (shares) to the children while still acting as manager. As they mature, they can be brought on as managers and eventually you can step away completely. The value of a minority interest in an LLC that they don't manage is heavily discounted allowing you to transfer more to them each year without gift tax consequences.

I have seen too many situations that a small fee to a real estate expert (CPA or attorney, not a broker) would have saved tens if not hundreds of thousands of $ at the back end.

 

[BillNOVA]

thanks for your input, gives me more to think about before making my decision

 

[emerytura]

Thank you Taxman59. Very good information.