This article was initially published in the Jan-Mar ’09 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.
Many absentee owners hold on to Oahu real estate so that they can pass the property to their heirs and be able to avoid capital gains taxes. The acquisition basis for the heirs is the value of the property at time of death of the decedent.* Most heirs sell the inherited property shortly after acquisition; therefore, there is little if any gain that will be subject to capital gains taxes. A good portion of our business results from working with heirs. In most cases the decedent is a parent that had been receiving our newsletter for years.
*Note: Special rules apply to owners that passed away in 2010
While it is desirable to avoid unnecessary taxes, problems frequently arise when there are several heirs that have an equal interest in an inherited property. Our experience indicates that when there are three or more heirs, about half the time a conflict will exist concerning what to do with the inherited property. The most common problem is a lack of agreement as to whether the heirs should continue to hold on to the property as an investment or sell it and use their tax-free proceeds elsewhere. Most of the time, the heirs are siblings with very different opinions. Often, one or more of them is cash-short and wants to sell the property immediately while one or more of the others may want to hold on to it.
It is not unusual for there also to be disagreements between the heirs that are separate from viewing the property as a long-term investment. Three examples follow: (1) One or more of the heirs may want to hold on to the home so they can use it on a future Hawaiian vacation. This particularly applies if the home has been used in this regard in the past by some but not all of the heirs. (2) If the property is a former family home, there may be widespread emotional differences between the heirs when it comes to selling. One or more of the heirs may want to hold on to the property so they can have future access to it for themselves and/or their children. (3) One or more of the heirs may be living in the property, often either rent-free or at a rent that is well under market rent.
There are legal steps that heirs can take to force a sale; however, legal actions between family members usually create major discord. Most of the time, the heirs decide on a compromise that normally involves continuing to hold the property for a period of time. On several occasions, we have waited for several years to be able to sell such a property. Our experience indicates that one strong-willed family member often blocks what the majority of heirs favor.
Many absentee owners opt to avoid the possibility of such an intra-family problem by selling their Oahu property, paying the applicable capital gains taxes, and then leaving easily divided cash or securities to their heirs. Every few years I put an article similar to this in the newsletter. Occasionally, an owner will refer to it and add something like, “I love all my siblings but they would have difficulty agreeing on almost anything.”
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Problems with Heirs
This article was initially published in the Jan-Mar ’09 newsletter and has since been revised and republished in the Jul-Sep ’11 newsletter.
Many absentee owners hold on to Oahu real estate so that they can pass the property to their heirs and be able to avoid capital gains taxes. The acquisition basis for the heirs is the value of the property at time of death of the decedent.* Most heirs sell the inherited property shortly after acquisition; therefore, there is little if any gain that will be subject to capital gains taxes. A good portion of our business results from working with heirs. In most cases the decedent is a parent that had been receiving our newsletter for years.
*Note: Special rules apply to owners that passed away in 2010
While it is desirable to avoid unnecessary taxes, problems frequently arise when there are several heirs that have an equal interest in an inherited property. Our experience indicates that when there are three or more heirs, about half the time a conflict will exist concerning what to do with the inherited property. The most common problem is a lack of agreement as to whether the heirs should continue to hold on to the property as an investment or sell it and use their tax-free proceeds elsewhere. Most of the time, the heirs are siblings with very different opinions. Often, one or more of them is cash-short and wants to sell the property immediately while one or more of the others may want to hold on to it.
It is not unusual for there also to be disagreements between the heirs that are separate from viewing the property as a long-term investment. Three examples follow: (1) One or more of the heirs may want to hold on to the home so they can use it on a future Hawaiian vacation. This particularly applies if the home has been used in this regard in the past by some but not all of the heirs. (2) If the property is a former family home, there may be widespread emotional differences between the heirs when it comes to selling. One or more of the heirs may want to hold on to the property so they can have future access to it for themselves and/or their children. (3) One or more of the heirs may be living in the property, often either rent-free or at a rent that is well under market rent.
There are legal steps that heirs can take to force a sale; however, legal actions between family members usually create major discord. Most of the time, the heirs decide on a compromise that normally involves continuing to hold the property for a period of time. On several occasions, we have waited for several years to be able to sell such a property. Our experience indicates that one strong-willed family member often blocks what the majority of heirs favor.
Many absentee owners opt to avoid the possibility of such an intra-family problem by selling their Oahu property, paying the applicable capital gains taxes, and then leaving easily divided cash or securities to their heirs. Every few years I put an article similar to this in the newsletter. Occasionally, an owner will refer to it and add something like, “I love all my siblings but they would have difficulty agreeing on almost anything.”
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