I’ve noticed something interesting going on the past few years. There are owners of multiple properties who purchased their homes years ago and now either leave them vacant or rent them under market value. Their thought is simply to leave the homes to their children. Always a nice thing when you can transfer wealth to your children. However, while you may be leaving them wealth in the form of residential real estate, are you really just leaving them a headache? What do the children do with the homes? The children don’t want to be landlords. One of them wants to live in it and have the other buy them out. One can’t see them selling the home and the other kids do, but the one who wants the home can’t afford to buy it.

Think about it… you are leaving them the homes and usually one executor in the family to make the decisions about the estate. This can cause problems and uncomfortable conversations or strife between the siblings. This, I’m sure, isn’t the intention of the parents leaving their children the properties.

What can you do to make sure the kids can still have a nice Thanksgiving together? There are a number of things. First of all, you can sell the homes and simply pay the taxes (if any) and have the cash ready for them to inherit when the time comes. Not everyone likes this option because they don’t want to pay the taxes. I get that. However we are talking about having a happy family vs paying taxes. Isn’t a happy family more important?

Another option is to exchange the property by doing a 1031 Tax Deferred Exchange. This will allow you to roll over the proceeds and defer the taxes. But you’re thinking, why would I sell the homes just to buy other home? You can exchange the homes for commercial real estate as well and still defer the taxes. There are properties out there where you can own the building and lease out the space to banks, restaurants, a Target perhaps. The tenant becomes responsible for taking care of all aspects of the property. It’s referred to as a Triple Net lease. If you’re not familiar with it, an NNN Lease is a net lease, structured as a turnkey investment property in which the tenant is responsible for paying the three major expenses associated with commercial real estate ownership. Property Tax, Insurance and Maintenance would all be cover by the tenant. You can simply collect the check. This type of property would be a great option to leave the children as there would not be family history with the property. Ie we had holiday gatherings in it. They would also have less problems with tenants as the lease would spell out clearly who pays for what.

So, think about this when you’re planning how you’d like to leave your legacy to your children.