Common mistakes when dealing with real estate ownership
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Common mistakes when dealing with real estate ownership

Probate can be a somewhat costly adventure for the estate as an attorney is generally hired to help the executor through the process.  The legal costs may range from 2-4% of the value of the probate estate.  The probate estate consists of the value of all the assets owned in an individual’s own name as of the date of death.  For this and many other reasons, families generally desire to avoid probate and the best way to accomplish this is for individuals to simply die not owning assets in their own name.   This can generally be accomplished through the use of revocable or irrevocable trusts.  Assets that are owned by such trusts are not considered to be owned in your own name and therefore avoid the probate process. 

  • Many people as they get older consider giving their home, vacation home or rental properties to their children during their lives.  Gifting the home, or any highly appreciated piece of real estate or other property like brokerage accounts mentioned above, to the children is not generally considered a recommended option in terms of real estate ownership, as it is fraught with problems.  For example, the parent would have lost complete control over any such real estate during their lives and with regard to their home, if they did not retain a life estate, they would have lost even the right to live there for the balance of their lives.  Furthermore, if they gifted the entire property they would have lost the ability to sell any such property or use the proceeds, while strapping their children with negative capital gains tax consequences. 
  • Another common mistake that occurs when dealing with real estate ownership is owning it either with a child or a friend as tenants in common.  Say, for example, the parents simply wanted to add all of their children's names to one of their rental properties as a tenant in common.  Now, the parents will have significantly reduced their control over that piece of property for, if they ever wanted to sell it, they would now need their children's permission.  In the event the children did agree to sell the real estate, the parents must remember that a portion of the proceeds would go to the children and not them.  This may be a problem, especially if the parents needed that money to enhance their retirement, or buy a replacement property.  In addition, even if the kids wanted to give back the proceeds they may be subject to a gift tax and would have to worry about the gift tax rules that were discussed above.  This is all on top of any capital gains tax that would have been paid by kids from the sale of the property.

Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors. Armstrong Advisory Group, Cushing & Dolan and The Securities America Companies are unaffiliated.  Representatives of Securities America Inc. do not provide legal or tax advice.  The scenarios provided are for illustrative purposes only and not intended to represent client experiences of Armstrong Advisory Group or the Securities America companies.  Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state. August 2012