Clients with long term real estate holdings often have negative capital, which results from cashing out with refinancings and from depreciation. The body of estate-planning literature contains few works that do justice to the central estate-planning considerations for holders of interests in real estate with negative capital — debt in excess of basis. Typically, the fact pattern arises when a taxpayer holds real estate long term, employing leverage that generates deductions and/or tax deferred proceeds on non-recourse financings. Ultimately, such property will have a low income tax basis relative to its market value and its nonrecourse encumbrances.
This article by Stephen M. Breitstone, co-head of Meltzer Lippe’s Wealth Preservation Group, originally published in Trusts & Estates, discusses these issues in detail, with particular attention paid to entity freeze partnerships, a particularly useful structure for transferring values out of estates without triggering inherent gain on negative capital assets.
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