Investment properties are great vehicles for estate planning. When a person's property is passed on to his heirs, the cost basis is reset to fair market value. What that means is that person can pass on wealth in the form of investment property capital gains free!
Also with the new 1031 Tenants in Common law/ fractional ownership rulings in 2002, investment properties can become even better estate vehicles. Basically, what the TIC ruling allows a person to do is to exchange a current property (on a tax deferred basis) for a single or multiple interests in another building. Why is this important? Maybe a person would like to pass on wealth to several people, or allow their heirs to sell down portions of the inheritance without having to sell the whole building. In the past, the heirs would have to sell the building and divide the proceeds. However, the TIC laws allow more flexible solutions. Take the following example:
Say a person wants to pass on $2M building to her two children. One child is just starting a family and needs cash. The second is more established and would prefer to keep the inheritance in real estate. The person can sell her $2M building and use the proceeds to purchase two fractional ownerships (50/50 or any other ratio) in another building or portfolio of buildings. She then could pass on these fractional ownerships to her two heirs. The first child could sell the ownership immediately (capital gains free). The second child could hold onto his inheritance in real estate and continue to remain a fractional owner.
