By Steve Tytler
Question: I have a question about an inherited condo.
My father-in-law passed away. His will states that proceeds from the sale of his condo will be distributed between his surviving children (my wife and her sister and brother). Can you please describe the pros and cons for two different scenarios that the siblings have been mulling over?
1. Sell the condo, on which there is no mortgage, and split the proceeds three ways as stated in the will. How would the title transfer be handled during the sale? Does the title need to be transferred to my wife as executor of the will, then she can sell the property? If so, how do we a handle a title transfer?
2. Rent the property out and split the monthly income between the three siblings in a partnership as investment income. Again, how to handle the title transfer? After transfer, could it be placed into the ownership of a LLC or something like that, with each kid being a partner in the corporation?
Answer: There is no “right” answer. It depends on the short-term and long-term financial goals of your wife and her sister and brother.
The simplest solution is option No. 1, in which you sell the property and split the proceeds. When my wife’s father passed away she was the executor of the will and she hired an attorney to handle the estate. She then contacted a real estate agent and put the house up for sale. When the sale of the house closed, the sale proceeds went to the attorney, who then divided the proceeds among the heirs specified in the will. It was a relatively simple transaction.
The advantage of selling the condo and splitting the proceeds is that your wife and her brother and sister inherit the property at the “stepped-up value” of today’s market value, so there are no taxable capital gains to them on the sale proceeds. If you hold the property as a rental, they would still start at today’s market value but any appreciation in value over the years from this point forward would be treated as a capital gain.
If you were asking me this question a few years ago after the housing bubble burst, I would say that you would be better off selling than holding the condo as a rental because condo prices were likely to drop over the next few years. We are now seeing the housing market start to stabilize, and while condo prices are still very depressed in many areas, the worst is probably over and prices may go up over the next few years.
But you never want to count on appreciation to make money with rental property; it is the “icing on the cake.” You want to make sure you have a positive cash flow, and you have a great advantage because there is no mortgage debt on the condo. Therefore, you are guaranteed to make money each money each month by renting it out. But you have to ask yourselves, could you get a better return on your share of the condo if that money were invested elsewhere rather than tied up in the condo for many years?
Also, real estate partnerships rarely work out well over the long term because the partners often have differing financial goals. And division of labor is often a contentious issue. Who is going to manage the property and keep it rented? Condos do not require as much maintenance as a rental house, but there will be repairs in the future.
If you choose to keep the condo as a rental, I recommend setting up an LLC as a simple business form to hold title to the property. Consult an attorney for further details.
Email Steve Tytler at firstname.lastname@example.org.