Podcast episode (Freedom through Passive Income) by Flip and Danny Robison explaining the "step-up in basis" tax rule and its use in passing real estate (example: a 56-unit apartment) to heirs to reduce capital gains taxes. Hosts contrast transferring property while alive (beneficiary inherits original cost basis) versus inheriting after death (beneficiary receives stepped-up basis at market value), and highlight this as a tax-efficient strategy for generational wealth transfer while urging listeners to consult professionals and noting changing laws may affect outcomes.
Hey, everybody. Flip and Danny here, founders of the Freedom Real Estate Group, family of companies. And welcome to another episode of our podcast, which is called Freedom through Passive Income. That's right. And this episode is called Generational Wealth. Part. Trace. Trace, Trace. Because we already did uno and Os.
Okay.
Part three. This is called the Sept. Up basis. And before we get into this quick disclaimer, we are not attorneys. We are not accountants, CPAs, vegetarians, any of those other things. We're not those.
No, we're not.
We're not any of them.
Nope. So let me explain why we're doing this one. I was on a coaching call and talking to some of my coaches who are in the multifamily space, and they're doing exactly what we're doing. And I said, you know, are you doing all these, you know, some of these for short term, three, five, seven years so that you can sell them and then reinvest, wash, rinse, repeat type, model, or are you holding them long term? And he said without hesitation, we're holding these long term because we all intend to use a step up in basis to be able to pass these on to our future generations.
Right.
And avoid, you know, a lot of the tax liabilities that you would have in certain situations. So we thought this, this is really another great topic to talk about because a lot of people don't understand what the step up in basis rule is or step up basis. You can say it both ways, but it's the same thing. So here's how it works. And we're going to use our 56 unit apartment as an example. So let's just say our cost basis for the 56 unit apartment all in is $2 million. Okay? And then let's say that the current market value of it is $8 million. And now we have a choice, Flip and I, to pass this on to a beneficiary either now while we're alive or after we die. Now, we're talking about generational welfare here, right? So typically this would be passed down to a family member, not while you're alive. You're going to want to do it when you die, and here are the reasons why. So if you pass this on while you're alive, or if we did, but we don't have kids, the cost basis then transfers to the recess recipient. So let's just say that we passed it on to one of our nieces or nephews. The cost basis of our $2 million is going to pass on to one of our nieces and nephews, right? But if we waited until after we passed away, then the current market value at that point in time, and let's just say it's 8 million, is now the cost basis for that niece or.
Nephew, meaning like leaving it to them in your will?
Yes, yeah, exactly. Thank you. So that's a difference of $6 million. Right. Of tax liability that that beneficiary would have had had we passed it on while we were live.
Right.
As opposed to after we passed. So that is super, super, super key.
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So an example would be the 2 million that we purchased. 8 million, current value that we already talked about. Let's just say your nieces and nephew decided they did want to sell and they sold it two years after we died. And at that point in time they could sell, sell it for 9 million instead of 8 million. Their tax liability at that point in time. 1 million.
Right, because they. Right, because they got it at 8 million, sold it at 9 million. 1 million.
Yes, exactly. So that's huge when it comes to preserving wealth and being able to transfer it down to heirs and to other people. And you know, it's all about the preservation. Right. Way as talk about the rules of money, what are they?
Spend it.
No, make it and keep it. I'll get that.
Right.
One third should be passing it down with the least amount of tax liability.
Possible and then spend it.
So this doesn't have anything to do with estate tax limits either in 2022 that are a little over 12 million. So just depending on, you know, the amount of wealth that you're intending to transfer. Obviously, that's why I flipped a disclaimer at the very beginning of this video so that you could talk to your tax professional, your legal professional about everything that's going on.
Right. So what you had just talked about is if they got it and it was at 8 million and then they sold it for, then they sold it for nine. So they had the $1 million that's taxable. But if we signed it over when we were alive, then it's still 2 million to them.
Still a cost basis of 2 million.
Right. And so then if two years later we pass on and two years later they said, oh, let's sell it at $9 million. Now it's a 7 million dollar.
You got it. You nailed it, Flipper.
I'm smart.
No, I appreciate you talking through that because it's really the example and sometimes when you're listening to something and not seeing it, it's very hard to just understand everything that they're saying. I know when I'm listening to things that people go through numbers and I'm like, nope, I need to sit down. I need to see it and figure out how it works. Now I. This also doesn't. If you're watching this video and tax law has changed due to, you know, administrations, future administrations, current administrations, if anybody's changing tax laws, which way the wind blows today. Yeah. Obviously you need to revisit the topic and really, you know, find out what the current, you know, rules and laws are with that regard. But the two big takeaways that we want you to take away this episode are, number one, the step up in basis is going to reduce potential capital gain taxes for the beneficiary. Number two, this is one of the most tax efficient ways to accumulate and pass on wealth for future generations. That's why we wanted to talk about it because generational wealth is a hot topic for people with families because obviously they're working really, really hard for 40 years, 50 years, 60 years to. To accumulate a bunch of wealth. They want to be able to transfer.
It and pass it down.
Yeah. As much as. As much as possible. So.
Excellent.
Yeah.
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