Mark Kohler shows how joint ownership of rental property can leave a surviving spouse with a $100,000 tax bill. When one spouse dies, only half the property gets a stepped-up basis. The surviving spouse inherits the other half at the original cost, creating a $300,000 gain that triggers federal and state taxes of 30-35% when sold.
Chapters
My 3 favorite words: stepped-up basis. You can either have a huge win with this or a huge disaster. Example, you and your spouse own a rental property. It's worth half a mil or a mil. It could be a commercial property, could be a single-family home, it could be an Airbnb, and it's got a basis of, let's say, $400,000. And you've been collecting cash flow off the rent for years, maybe even took some depreciation. The bottom line is you've got this big built-in gain. Now you own it in your joint revocable living trust through an LLC. Makes sense. That's what I do. Then of course averages are, especially with me with my high blood pressure, I'm going to die first. Sorry, Patty, if you're listening, don't listen. Okay, so I die first. Well, we only get a stepped-up basis on half the property. So if it's worth a million, then only half of it goes up to $500,000. The other half inherits half of the basis. So if the basis was $400,000, now Patty's got a $200,000 basis on a $500,000 piece of it. So she's got a built-in gain of $300,000. And you would think, well, she inherited it. Inherited the rental property, she should get a full stepped-up basis. No, no, no, no, no. She only gets it on half the property. So she goes to sell it, she's got a tax of— with Fed and state could be as high as 30-35%. So she's paying tax of $100,000 after I die, and when it could have been planned for in the estate plan.
