By: Jerry Fennelly, SIOR, President of Fennelly Associates
In the best of times, commercial real estate investment properties can be a great source of regular passive income. However, in the worst of times, commercial real estate ownership often brings headaches ranging from costly regular maintenance to emergency repairs to tenant turnover that can turn a simple investment into an expensive and complicated mess.
While it might all seem worth it to you, can you say the same for your family?
In many cases, owners often fail to properly prepare their investment properties to be inherited by their families. The lack of planning forces family members to deal with a range of potential challenges that I discussed in a previous article.
Whether you are close to retirement age or ensuring your affairs are in order as you age, following the steps below will ensure your commercial real estate property is ready to be inherited to eliminate unnecessary burdens on your heirs.
Incorporate your property into your estate planning.
- Consult with an estate planning attorney to ensure all legal documents are in order and that your plans comply with state laws.
- Ensure you have a valid will or living trust that specifies who will inherit the property. An attorney can advise you on the correct document for your unique situation.
- Verify that the property title and deed are correctly titled.
- Consider joint ownership with rights of survivorship or transferring the property into a trust.
Understand potential tax implications
- Proper planning can help minimize federal and state estate taxes through gifting strategies, trusts, or other mechanisms.
- Be aware of the potential capital gains tax implications for your heirs, especially regarding the stepped-up basis rule which can affect the property’s valuation at the time of inheritance.
- If you are considering gifting the property before death, understand the annual gift tax exclusion and lifetime gift tax exemption limits.
Secure an up-to-date property valuation
- Get a professional appraisal to determine the current market value of the property. This will help understand potential estate taxes and ensure accurate record-keeping.
- Conduct a market analysis to project future value, rental income, and expenses.
Stay current with financial considerations
- Ensure all mortgages or liens on the property are accounted for and decide whether to pay these off or transfer to the heirs.
- Maintain adequate property insurance, and consider life insurance to cover any debts or taxes.
Avoid deferred maintenance and inexperienced management
- Keep the property in good repair to maintain its value. It’s also critical to address any major repairs or updates needed to avoid passing the responsibility along to your heirs.
- If the property is rented, ensure a management plan is in place. Consider hiring a property management company if your heirs are not experienced in property management.
Communicate with your heirs
- Have open discussions with your heirs about your plans and their responsibilities so there aren’t any surprises. Ensure they understand the value and obligations that come with the property.
- Keep all important documents organized and accessible. This includes deeds, titles, mortgage information, insurance policies, rental agreements, and any other relevant paperwork.
Seek professional insights
- An experienced commercial real estate broker can be a trusted resource to help you understand potential options for your property. Perhaps the market conditions make a compelling case for a sale or strategic capital improvements could make the property much more attractive to prospective tenants. A knowledgeable commercial real estate broker can help provide the insights you need to make the right decision.
Are you still struggling to craft an inheritance strategy for your investment property?
Contact us today to experience why hundreds of clients trust Fennelly Associates to help them successfully create and execute commercial real estate strategies for all kinds of properties.
