What is the best way to pass on real estate to heirs? How do you pass real estate down to your children? Why would you pass real estate down to family? For one thing, it's a way to keep the property and not sell it and pay capital gains taxes. For another reason, it's a way to continue to build wealth through cash flow and keep it in the family.
I've always said there's nothing wrong with nepotism. Nepotism is the practice of showing favoritism to relatives. It might sound unfair at first, but it really isn't, as long as the family members learn about real estate and do a good job. If so, they deserve benefits based on their performance, just like any other person.
It's one thing for Trump's dad to give him a million dollars to get started in the real estate business in New York, it's another think to pass down an investment property to a son who has been helping take care of it for years.
But the true benefits of a family owned business are the inherited traditions and knowledge of managing and buying property. In other words, you don’t just pass down a business but rather an entire framework of operations and a strong work ethic that made the company successful to begin with. Another great benefit is the success and comfort of your progeny’s future, and the pleasure of possibly taking them to work during childhood. This gets them an early start in the playing field and usually motivates them to do a good job in the future.
For example, if you’ve watched the show Flip That House, you may recall the Fisher family, whose extensive familial network has turned a Mom & Pop flipping venture into something far more sizable—and profitable. The Fisher children spent their childhoods living in “fixer” houses, watching and helping their parents clean, paint, landscape, and ultimately sell houses. Now, the children are all grown up and live in California, working with their parents in real estate investing. Even in-laws and grandchildren have joined in on the action.
As you might gather from the Fisher family, with a family owned business, there’s generally a stronger sense of unity and devotion towards the success and advancement of the business. Maybe this is because everyone’s future is dependent upon the business, or maybe it’s because your name is attached to it. Just think about it: Wouldn’t you be more motivated to perform optimally if your future—and past generations of success—were at stake?
Scenarios such as these are reinforced almost every day. In July, 2007 Real Estate Weekly’s Profile of the Week centered on Kalmon Dolgin Affiliates, a family owned real estate business that has enjoyed success for over 100 years in New York City. In fact, the company has recently expanded from a major regional business into a national one. Much of this expansion is owed to Josh Dolgin (vice president) who worked his way up in the company and gained experience from other avenues.
In fact, family owned real estate businesses are everywhere, more so than you may think. As the Boston Globe reports, family owned business employ roughly 80% of the American work force, and about 35% of Fortune 500 companies are family operated. Real estate is no exception—all you need to do is perform a search online and you’ll find several family owned real estate companies. If you ask me, these local businesses might be your best bet. Who else would know the area better than those who have been selling local property for a generation or two?
Now, I’ve probably made it out to seem that a family business is easy to maintain once the kids get involved, and that they’ll continue to uphold the standards you hold dear. Well, the truth is, many parents find it difficult to even convince their kids to continue their legacy. As an article from Forbes.com explains, nearly one-third of family businesses never make it to the second generation stage because the children (when grown up, of course) would rather do something else with their lives. This is a discouraging reality, whether you’re in the funeral business, agricultural sector, or the real estate arena.
As touched on earlier, it’s important to get the kids involved with the business at an early age, with literally all aspects of the company. You see what it did for the Fishers, right? If you have your own real estate company, just think about all the ways kids can help out: painting, ripping up carpeting, choosing new fixtures, even landscaping. Kids love to get in on the action, especially if it’s hands-on. For more tips and situations that other people have faced, read more here.
Once the kids are hooked, though, and they want in, you’ll need to take steps to transfer the business in a fair manner. How do you do it? The Louisiana Law Blog has a great article that outlines some important considerations you should acknowledge:
Even if you’re not in the business of buying and selling properties[link to Sell Your Home Yourself, keeping a house in the family pays off in more ways than just financially. I have a friend who recently got married and bought his grandmother’s home. It must give the family great pleasure to keep a home in the family, especially for the grandma who now knows that her house will serve as the home for a new generation to come.
The reverse scenario can happen as well. A son or daughter can buy their father or mother a home and pay the mortgage for them while they live in the house. There are tax benefits to this, but you’re not looking for cash flow here, just helping out your parents. You can also look at this situation another way. You’ll also have two houses—presuming you live in one yourself—that you can dabble with in the future, live in, or give to your own children.