Why Real Estate is a Powerful Estate Planning Tool

By Matthew McFarland, Associate at Kay Properties & Investments and The Kay Properties Team

Real Estate has been and remains one of the most powerful estate planning tools.  There are numerous reasons real estate is positioned to be one of the most tax-efficient investment tools that exist— here are just a few:

1) Step-up in Basis:

To many investors and tax professionals, this is where the majority of the tax efficiency comes.  A “step-up in basis” refers to the reassessment of property value between generations.   When an owner of investment real estate passes away and the property is passed to the next generation, the property values are re-assessed at current market value, effectively resetting many of the owed taxes that the original investment property owner has accumulated over their lifetime (capital gains and depreciation recapture taxes).  It is important to note that the passing down of assets is pursuant to the trust and will of the deceased and that many taxes will still apply (estate taxes, state-level taxes, etc.)—It is important to consult with tax/legal advisor to understand fully one’s tax situation.   

2) Potential for Cash flow:

The beneficiaries of the inherited property potentially have the benefit of taking ownership of a property with existing cash flow to supplement other forms of income. 

3) Refinance potential:

For many, investing in real estate is a long-term play.  It is very common for a property to be held in a family for decades, even generations.  In most cases, real estate values increase over time, especially if the property is well located and exhibits strong fundamentals.  As values climb and the equity ownership in the real estate climbs, typically so too does the ability for one to pull out money in the form of a refinance.

It is important to note that this does not warrant tax or legal advice.  One should always consult with their own tax or legal advisor to get a more complete understanding of their own situation, as it is different for each investor.