Scott Ditman, a certified public accountant and tax partner at Berdon LLP, said real estate companies are especially susceptible (to proposed IRS rules placing limitations on the use of valuation discounts) because they have unique income structures.
Unlike other types of business owners who have an opportunity to take advantage of discounts now by gifting family entity and limited partnerships interests before the rules become final, "when you have a real estate entity, you can't necessarily just give stuff away," Ditman said.
"With real estate, the income tax basis of the assets could be significantly lower than the market value, even negative because in that industry you can depreciate the real estate and you can refinance and take money out," he said. People can have what are called "negative capital accounts" at times, he added.
If an owner has real estate worth $100 million, but a current basis of zero, he or she won't want to give the property away and risk losing the benefit of a step-up basis in death where the value of the property is raised to the fair market value when a beneficiary inherits it.
By using the step-up, the beneficiary is only responsible for the capital gains tax on the appreciation in value that occurs from the point they inherit to the point when they sell, which provides a huge income tax advantage that would "dwarf what I'm losing based on the discounts," Ditman said.
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