Residential Real Estate & Estate Planning and Probate

I. INTRODUCTION
The American dream!!!! Owning real estate in some exotic place! Skiing in the mountains, sitting on the beach, golfing PGA courses, or just being closer to the kids in the summer time are all reasons to own real estate other than your primary residence. Normally this type of real estate ownership is in a desirable location which can result in a large appreciation in value over a short period of time. This outline will give practitioners some idea of the income tax, organizational structures, estate planning alternatives, and distribution on death relating to real estate owned by their clients. The outline will primarily focus on residential real estate other than a primary residence, such as a second home or vacation home. This outline will not address real estate ownership in foreign countries.




II. FACTUAL SCENARIO
The following factual scenario will be utilized in this outline (hereinafter referenced with the words “in our example”):
Hank and Wilma Rich live in York, Nebraska, where they run a very successful specialty donut shop. They own a home in York worth $250,000.00. They own the business and property worth $1,400,000.00. They have other liquid investments worth $700,000.00. Hank and Wilma have no debts, other than ordinary business debts. They also have 2 children, Bobby, age 30, and Gayle, age 25, who luckily live outside their home. They enjoy skiing in the mountains of Colorado and have recently considered buying real property in Colorado, near Beaver Creek. They have also considered purchasing property in Florida and Arizona. In order to reduce the cost of the purchase, they have also considered buying the real estate with some friends and splitting the use. They come to their attorney, Dudley Dewright, for advice on the possible purchase or purchases and future planning.

III. INCOME TAX TREATMENT OF REAL ESTATE DURING LIFE
The IRS determines the tax treatment of a real estate based upon its use. Is it a vacation home located at Bachelor Gulch that the family will occupy most of the winter season? Is it a real estate investment that is rented out most of the time or a structure that houses a satellite business? Is it a lot in Arizona waiting to be built on? The use of real estate may also change over a period of time from an investment to a personal residence. For purposes of this outline, the tax treatment section will only cover one real estate property, and a third or fourth property may not receive the same tax treatment as a second home. See IRS Publication 936 (2005).
A. WHAT IS A SECOND OR VACATION HOME?
For favorable tax treatment, a second home does not have to be a house. It may also be a condominium, cooperative, mobile home, house trailer, or boat. As long as it has sleeping, cooking and toilet facilities, it can be treated as a second home. A second home does not include property used exclusively as a hotel, motel, inn or similar establishment. IRS Publication 936 (2005). A self-propelled motor home was considered a second home for income tax treatment. Haberkorn v. Comm., 75 TC 259 (1980).

B. SECOND OR VACATION HOME INCOME TAXATION
There are three categories of second homes. The categories are primarily based upon how the home is used and are determinative of how the house is treated for purposes of income tax benefits and capital gains taxes. The most common category for second homes or vacation homes are those used and taxed for “personal use”. However, the fact that a house is placed in one category for one tax year does not prevent it from moving to another category the following tax year if the use changes.
1. PERSONAL USE
A second home may be used purely for personal use. If a dwelling used as a residence is rented for less than 15 days during the taxable year no deduction is otherwise allowable because of the rental usage is allowed and the rental income is not included in gross income. IRS Publication 537, at 5 (2005). Under this set of circumstances, the owner does not have to pay taxes on the money he earns from renting the home. IRS Publication 936 (2005). The other benefit is a tax deduction of home mortgage interest secured by the property if the debt is $1,000,000 or less ($500,000 or less for married and filing separately). IRS Publication 936, at 1-2 (2005). The major pitfall to making this use of the property is that you cannot take tax deductions for losses related to the property.
2. PARTIAL RENTAL
A second home may be rented out but still qualify for the mortgage deduction. To maintain the mortgage interest deduction (applied against the owner’s taxes as a whole), the owner must use the home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. IRS Publication 527 (2005). In this situation (where the property is rented out for 15 or more days at fair market value), the owner is required to pay taxes on rental earnings. See IRS Publication 527, at 5 (2005). However, the owner is allowed to deduct from the total gross incomes of the rentals property taxes and home mortgage interest, expenses relating to operating or maintaining the dwelling unit, casualty and theft losses, and depreciation. IRS Publication 527, at 7 (2005). However, only the percentage of these expenses proportionate to the amount of time the property was rented (as opposed by put to personal use) may be deducted. James Fellows, Vacation Homes and Federal Tax Law, 32 Real Estate Law Journal 150 (2003). In our example, if the Rich family from York lived in their second home for 100 days and rented it for 100 days, they would only be able to deduct half of the above mentioned costs from their rental earnings. Further, losses may be carried forward and applied against taxes on the rental fees in coming years. Id.
3. ITS ALL BUSINESS
Second homes may also be characterized primarily as a rental business if the owner does not make sufficient use of it as a residence (where the property is rented out for 15 or more days at fair market value and the owner does not use the home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental). In this category, the owner loses out on the above mentioned mortgage interest tax deduction, and now may only deduct for mortgage interest against the rent income. Id. at 5. Further for every day of personal usage he makes of the house, he must account for it by decreasing the amount of rental expenses (percentage-wise) against which he can make a deduction. Id. at 5. A day of personal use is any day, or any part of a day, a dwelling unit is:
(1) used for personal purposes by a taxpayer or any other person who has an interest in the unit, unless it is rented as a principal residence under a shared equity financing agreement;
(2) used by a member of the taxpayer's family;
(3) used by an individual who uses the unit under an arrangement which allows the taxpayer to use some other dwelling unit for any period of time whether or not a rental is charged for the use of the other unit and regardless of the length of time the taxpayer uses the other unit; or
(4) used by any individual at less than fair rental value.
Any day spent by a taxpayer repairing and maintaining the property on a full-time basis is not a day of personal use.
If the Rich family used the their second home for 5 days, and it was rented for 95 days, they could only deduct 95% of their expenses from the rent received. See id. Also,

renting homes in this category is considered a “passive activity,” and the owner may not deduct more than $25,000/year in rental losses from adjusted gross income for tax purposes. Id. at 4. Problematically if, the owner’s income is over $100,000, he cannot deduct the full amount of losses, and if his income is over $150,000, he may not deduct any losses on a yearly basis as the deduction is phased out from $100,000 to $150,000. Id. However, any carried over losses may be deducted at the time that the home is sold regardless of the owner’s income. Id.

C. CAPITAL GAINS TAX ON PERSONAL USE
Generally, a second home owner is typically stuck with capital gains taxes when selling a second home that is a personal residence and not a business or investment. However the following are some suggested ways a taxpayer may lessen the burden on the capital gains tax on the sale of a second home which is used as a personal vacation residence:
1. 1031 EXCHANGE-RISKY!!!
Section 1031 of the Internal Revenue Code allows investors to sell a property, reinvest the proceeds in a new property and avoid all capital-gains taxes. The regulation states "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
Vacation property is generally considered to be held for personal use if it is used by the owner for more than 14 days during the year or for more than 10% of the number of days the property was rented during the year at fair market value.
In 1981 the IRS issued a Private Letter Ruling (Ltr Rul 8103117) that allowed a 1031 exchange on a vacation home that was sold and replaced with another vacation home. The old vacation home that was sold had not been rented for the six or seven years prior to the exchange, and had been held for both "personal enjoyment" and as a "sound real estate investment." The New Vacation Home that was purchased was also intended to be held for the same personal enjoyment and investment intent.
If a homeowner rented the vacation home to unrelated parties for approximately two years prior to the exchange may work. Any rental, even to family or friends, also will help establish the property as being held for investment. A written lease should be used and the rent should be FMV and reported as income on annual tax returns. Additionally, if the letter ruling is correct for all taxpayers, the vacation homeowner should document that he or she has investigated appreciation rates, capitalization rates and possibly even rates of return prior to purchasing the property; keeping logs of repair and maintenance expenses during the period of ownership and having the property appraised periodically to keep track of its value.
2. MAKE INVESTMENT PROPERTY YOUR PRINCIPAL RESIDENCE
Making your investment property your principal residence for two years may allow one to take advantage of the possibility of no capital gains. You will not have to pay taxes on as much as $500,000 of the gain if married and filing a joint return with a spouse or $250,000 if single.
3. KEEP TRACK OF YOUR EXPENSES
Remember that the use of investment property could change over its life cycle and keeping track of all expenses will be beneficial in correctly figuring the real estate’s adjusted basis. Add to the price of the house things such as closing and settlement costs and qualifying improvements so that the capital gain is not so large. Note that, problematically, if your home is sometimes in the business category, and sometimes in the other categories in different years, there is no clear cut answer as to whether it will be treated as business property so that you can deduct for loss when it is sold for tax purposes.
4. DEATH
Pretty sure way to step up the basis on real estate which allows ones heirs to reap the profits on the sale of the real estate. In addition, real estate typically qualifies for stepped up basis on death even if placed in an irrevocable trust.

IV. ORGANIZATIONAL STRUCTURE & MULTIPLE OWNERSHIP
There are many options for ownership of real estate. The best option is dictated by the use of the real estate for tax purposes and the number of additional owners. If the real estate is used exclusively for investment, than an organization such as a limited liability company or corporation would be beneficial to shield the owner or owners from liability and provide for gifting and 1031 exchanges. Individual or fractional ownership is preferable for personal use real estate to avoid domicile issues and allow for possible deductions on financing. Another factor in multiple ownership has nothing to do with liability or taxes and primarily deals with vacation real estate. This factor is what I call “how do I get my money’s worth” factor. If vacation real estate is owned by several individuals, there will need to be rules and guidelines to prevent problems in the future. The following entities will provide a brief idea of a client’s options on ownership of real estate.
A. TIMESHARE
A time-sharing arrangement is any arrangement whereby more than one person with an
interest in a dwelling unit exercises control over that unit for a different period during the year, such as 12 people each exercising control over a dwelling unit for one month of the year.
Under a time-sharing arrangement, a taxpayer's continuing interest in property is considered to be the entire year and not the one month, or whatever other periods the taxpayer has direct control over the units. Thus, for the personal use rules of the greater of 14 days or 10% of the number of days the unit is rented at fair rental value as will be discussed later in this outline, all of the owners' activities are aggregated. The Proposed Regulations treat investors in a time sharing arrangement, effectively, as tenants-in-common.
In our example, if the Rich family was included with 26 individuals who each own a two-week period under the time sharing arrangement, and it is used for personal use by five owners for a total of 10 weeks personal use, then all 26 people, including the Rich Family, will be treated as having used the dwelling unit as a residence during the taxable year. The owners have exceeded the 14 days or 10% of rental days limitation on use.
B. FRACTIONAL SHARES & RULES
Limited fractional ownership or co-tenancy is probably the safest ownership of real estate owned by more than one individual. Ownership is treated the same as the timeshare for tax purposes however, it is much easier to keep track of the “use” your co-owners are making of the real estate if there are less owners.
Timeshares typically already have built in rules that each owner must follow. However, in co-ownership vacation properties in which there are only a few owners (regardless of the entity used), problems may arise concerning the use of the particular co-owners and their families & friends. To alleviate these problems it is advisable to have “Rules” drafted in agreement form so everyone is getting their “fair use” of the property. Attached hereto as EXHIBIT #1 is a sample of Rules and Regulations of vacation property in Missouri that is owned by co-tenants in Nebraska. In addition, attached hereto as EXHIBIT #2 is a sample of an Operating Agreement and House Rules of Organization of a Nebraska LLC which owned Colorado property. The attachments are an example of rules and guidelines which may be used in the co-ownership of vacation property. On a side note, in the sale of the Colorado property owned by the Nebraska LLC, both the CPA and the 1031 advisors in Colorado suggested a like kind exchange for this property, even though the members never rented it out and the property was treated as a personal use vacation home for income tax purposes.


C. FAMILY LIMITED PARTNERSHIPS
There are few advantages to placing real estate under the management of a “family”
limited partnership (FLP), unless the real estate is used for investment purposes. Most second homes or vacation homes are utilized for personal use as previously illustrated in this outline. As long as the real estate is primarily for personal use, the IRS may disregard the FLP for tax protection purposes if it is not used for business purposes. See 9 Merten’s Law of Fed. Income Tax’n. 35:293. Further, special rules apply to personal use real estate that “cannot be escaped by having the taxpayer’s entity own the property.” James Fellows, Vacation Homes and Federal Tax Law, 32 Real Estate Law Journal 150 (2003). Overall, a vacation home will typically be treated as personal use property and will not be treated as part of a business entity unless it is actually used almost exclusively for profit.
D. LIMITED LIABILITY COMPANY
Similar to FLP. Works very well for investment real estate and for gifting purposes. Not so well for personal use second homes unless there is no rental income. If the entity reports rental income on its own tax return (informational or not), the more than likely the vacation home is going to be considered investment property. Arguably the members should be treated the same as fractional share or timeshare owners for personal use vacation homes. In personal use situations, the members may have a problem with protecting the shield of liability from being pierced.


E. CORPORATION
Similar to FLP and limited liability company. Works very well for investment second
homes and for gifting purposes. Not so well for personal use second homes unless there is no rental income. Arguably the shareholders should be treated the same as fractional share or timeshare owners for personal use vacation homes, but not as good of an argument as a LLC or a FLP. If the entity reports rental income on its own tax return (informational or not), the more than likely the vacation home is going to be considered investment property. In personal use situations, the shareholders may have a problem with protecting the shield of liability from being pierced.

V. PLANNING FOR DEATH
Most practitioners realize that families typically will have a special bond with a second home or vacation home that has been in their family. Many holidays and family gatherings were spent there creating fond memories for all. Some clients may care less about tax treatment of their entire estate as long as they can preserve “the cabin at the lake” or the “condo at Beaver Creek” or the “home in Palm Springs” for future generations. The following information will give the practitioner an idea on methods to do this with and without an estate tax benefit as well as brief description of laws and problems incurred with ownership of property in other states.
A. WILL
Using a will to dispose of real estate is not always the most cost effective disposition for wealthier clients. Typically, the entire date of death value of the real estate is included in the estate, which may be good for future capital gains if the property has appreciated (stepped up basis), but hurts when your beyond the estate tax thresholds. The will may contain a provision giving a beneficiary a life estate in such real estate, placing it in a testamentary trust, or specifically devising it to all beneficiaries as co-tenants. Another problem arises with a will disposition of a second home if the real estate is owned in another state than the decedent’s domicile. In this situation, an ancillary proceeding will most likely be necessary involving more administrative costs.
B. REVOCABLE LIVING TRUST
A standard living trust which has the real estate as an asset is a simple way to give some control over a real property and avoid some administrative costs. It will give the owner several options to preserve the real estate after death. The largest advantage, in my opinion, is when the real estate is located in a state other than the decedent’s domicile. No ancillary proceeding is necessary in most cases and the asset may be transferred very quickly. The experience of handling an estate of a client who died in Nebraska who owned property in Arizona, Florida, or California, may cause “sticker shock” to both the practitioner and the family of the decedent. It has been my experience that our brethren in those states apparently have a different lifestyle to support than we do here in the sticks. Attached hereto as EXHIBIT #3 is a sample living trust over a residence that has no marital deduction planning.
C. QUALIFIED PERSONAL RESIDENCE TRUST (QPRT) - EXHIBIT #4 & #5
Assume in our example that Mr. And Mrs Rich found a beautiful second home in Colorado, near a ski resort worth $1.8 million. Also assume that they would like to give the property to their children to reduce their taxable estate but also want to continue to use the property. A estate planning technique called a qualified personal residence trust (QPRT) found under 26 U.S.C.A. § 2702(a)(3)(A) of the Internal Revenue Code and 26 CFR § 25.2702-5(c) of the Gift Tax Regulations, can help the Rich family do just that. A QPRT is not to be confused with a GRIT (Grantor Retained Interest Trust) under 2702. If the remainder beneficiaries in a GRIT are ancestors, lineal descendants or siblings of the grantor (or spouses of any of them), there is no benefit to putting the vacation home in a GRIT.
The QPRT allows Mr. & Mrs. Rich to pass their home to their children at a fraction of its current value for gift tax and unified credit purposes while continuing to use it during their lifetime. A QPRT also may allow Mr. & Mrs. Rich to transfer future appreciation on the property gift and estate tax free.
1. QPRT GENERAL GUIDELINES
To qualify as a QPRT, a trust must meet several criteria:
-It must not contain assets other than a personal residence. However, it can contain a limited amount of cash for operating expenses.
-The personal residence must be the term holder's principal residence or one other residence of the term holder (vacation or second home).
-Income from the trust must be distributed to the term holder at least annually.
-The trust instrument must prohibit distributions of corpus prior to the end of
the trust term to any beneficiary other than the transferor.
-The term holder's interest may not be commuted or prepaid.
-The trust must cease if the residence ceases to be used as a personal residence of the term holder.
- Within 30 days after ceasing to be a QPRT, the assets must be distributed to the
term holder or the trust must be converted to a grantor-retained annuity trust (GRAT).
2. WHAT DOES THE IRS CONSIDER A PRINCIPAL OR OTHER RESIDENCE?
The IRS has ruled the following properties qualify for a QPRT:
-A home, two buildings, and a swimming pool on a large tract of land that was restricted by a conservation easement. Let. Rul. 200039031.
-A residence on a 65-acre tract. Bennett, DC-Ga, 61-2 USTC.
-A vacation home qualified for QPRT status despite having a Jacuzzi, a separate one-bedroom cabin, a tennis court, and sufficient acreage to qualify for a conservation easement. Let. Rul. 200109017.
-A 2.5-acre parcel with a home and a barn that was co-owned by a husband and wife and severed from a 14.3-acre parcel which was leased to a farmer. Let. Rul. 200004037.
-A gift of the grantor's house that was transferred to a QPRT by the beneficiary pursuant to a power of attorney. TAM 199944005.
-A grantor's stock shares in a cooperative apartment. Let. Ruls. 199925027, 9447036, 9433016, and 9151046.
-A home owned by a couple as community property. Let. Rul. 199908032.
-A vacation home with a section that is leased to unrelated individuals. Let. Rul. 199906014.
-Land with multiple buildings, all of which were used residentially. TAM 9722009.
-Three adjoining parcels with land appropriate for residential purposes. Let. Rul. 9705017.
-A 16.6-acre coastal property was qualified for use in a QPRT. Let. Rul. 9645010.
3. HOW DOES A QPRT WORK?
a. The Basic Idea:
A QPRT may serve a useful purpose when the settlor wishes to transfer his or her personal residence to family members (usually children) at some time in the future, and to reduce the overall transfer tax cost--that is, estate and gift tax cost-- of the transfer. For gift tax purposes, the original transfer will be treated as a gift of the remainder to the remainder beneficiaries (for example, the children) and the settlor must file a gift tax return at the time the residence is transferred to the trust. The value of the remainder is derived by first determining the fair market value of the entire property, and then subtracting the value of the retained interest.
The value of the retained interest is a function of the length of the trust term, calculated in conjunction with interest rates published by the IRS for making present value calculations. Other things equal, the longer the term of the trust, the larger the value of the retained interest, the smaller the value of the remainder, and the smaller the taxable gift. The amount of gift tax due will usually be offset by the settlor's unified credit so there should not be any out of pocket payment, but the settlor's credit (against future taxable gifts or estate tax) will of course be reduced.
b. The "Gamble":
If the settlor dies before the trust has terminated, the residence will be included in his or her taxable estate, and estate tax will be paid on it, because the settlor retained the use of the property for a period that did not end before his or her death. That is, the purpose of the trust will have been defeated. If the settlor does not die during the trust term, however, the property will be distributed to the child(ren) without further transfer tax.
As previously mentioned, when the trust term is relatively long, the value of the gift to the remainder beneficiaries will be relatively low, and the gift tax cost of transferring the residence to the trust will be correspondingly low. In contrast, when the trust term is relatively short, the value of the gift to the remainder beneficiaries will be relatively high and the gift tax cost of transferring the residence to the trust will also be correspondingly high. However, the lower gift tax cost that results from a relatively long trust term must be weighed against the greater risk that the residence will be included in the settlor's gross estate if he or she dies before expiration of the trust term. In theory, a QPRT will afford the greatest transfer tax savings when the settlor is young and the trust term is long.
c. The “Good” aspects of a QPRT:
The calculations involved in determining the valuation of the gift are rather complex. However, if the term of the trust were to be set at five years, it is likely that the value of the gift would be about two thirds of the value of the property, and the gift tax would probably be about 40% of that. If, on the other hand, the trust term were set at ten years, the value of the gift would be closer to 40% of the present value, and the gift tax would be about 40% of that. The obvious disadvantage with the longer term is that it reduces the likelihood that the settlor will outlive the trust term; that is, it increases the chance that none of the hoped-for benefits of the trust will be realized. The longer term also increases the likelihood of substantial market appreciation, i.e., a large trade-off of capital gains tax savings for transfer (estate and gift) tax savings.
In our example, lets assume Mr. & Mrs. Rich, set up a QPRT for their $1 million vacation home in Colorado. Their son is the trustee and their son and daughter are the beneficiaries. The home is transferred to son, Bobby Rich, trustee of the Hank and Wilma Rich Qualified Personal Residence Trust, and Hank and Wilma Rich retain a right to live in the home for 20 years. The value of the gift is estimated at $182,000 after deducting the life estate Mr. & Mrs. Rich have retained. They now file a gift tax return in this amount. No tax is due since this gift is well within their estate tax exemption. Had they not set up the QPRT, in 20 years the home would be worth $2,653,000 (at an annual appreciation rate of 5%), bearing an estate gift tax of $1,326,500 at a 50% tax rate (and assuming Hank and Wilma have utilized their exemption). Instead, Hank and Wilma Rich do outlive the trust term and the property goes to the children without any estate tax. Of course, they would have to rent the vacation home from the children if they wanted to continue to use it after the term.
d. The “Bad” aspects of a QPRT
The effects of a carry-over income tax basis must also be considered. This concerns the income tax liability to the remainder beneficiaries (the children, for example) if they sell the residence either following the settlor's death or following termination of the trust. If they were to take the residence by inheritance, it would have an income tax basis "stepped up" to its value as of the date of the parent's death. On the other hand, if the QPRT "bet" succeeds, i.e., if the settlor outlives the trust term and the children take the remainder under the terms of the trust, their basis will be the same as the settlor's. If there is substantial market appreciation over the price the settlor paid, the increased capital gains tax may well offset the lower gift tax achieved by the QPRT.
A QPRT is an irrevocable trust. Unless the trust ceases to qualify as a qualified personal residence trust, the settlor cannot expect to regain ownership of the residence, and when the trust term expires according to the provisions of the trust instrument, the residence will automatically pass to the remainder beneficiaries. After expiration of the trust term the residence may be unavailable to the settlor either as a residence or as an asset that can be sold if financially necessary. Also, because the trust is irrevocable, it must keep its own books and file annual federal and state income tax returns. The expense and bother of these factors should be considered.
The settlor may also be required to leave the personal residence when it is distributed as at the end of the term, the settlor forfeits all right to occupy and control the property. However, settlor can rent the property by paying fair market rent when the term of the trust expires. NOTE: It may be risky to enter into a lease arrangement before the end of the original trust term as that the settlor will not in fact lose the use of the residence on expiration of the trust term, but will have some right to remain in the residence beyond that time. It is possible that the trust might not be recognized as a QPRT and the advantages of the trust would be totally lost.
e. Eligibility for Capital Gain Exclusion & Income Tax:
If the trust instrument requires that any income of the trust be distributed to the settlor, the trust is a "grantor trust" for income tax purposes and the settlor will be treated as the owner of the trust for income tax purposes. Because of this the settlor may deduct trust deductions for real estate taxes and any otherwise deductible mortgage interest and may elect to take advantage of the $250,000 ($500,000 for a married couple) exclusion of gain on any sale of the residence. If the residence is sold, the basis may also be carried over to any replacement residence under provisions of the Internal Revenue Code.

D. DOMICILE & TAX SITUS
For estate tax purposes, an individual can only have one domicile. If that domicile is in Nebraska, the individual’s estate in Nebraska will be subject to Nebraska death tax. Changing an individuals domicile is an effective way to minimize state death taxes. In our example, lets assume the Rich family decide to buy a vacation home in Florida. Upon their retirement, the Rich family should consider changing their domicile from Nebraska to Florida as Florida has no state death tax. When recommending a change in domicile, the practitioner should review the laws on domicile of the particular state as there is no clear cut rule that applies in every state other than the rule that an individual taxpayer can only have one domicile.
If part of that individual’s estate is land in another state (the “tax situs” of the asset), then the land is subject to the laws of that state. In our example, the Rich family might consider buying a vacation home in Florida which has no estate tax. If Mr. & Mrs. Rich die in Nebraska, generally speaking, their vacation home in Florida is not subject to Nebraska inheritance and Nebraska state estate tax, and thus will pass state estate tax free. NOTE: 1. Some state’s only reduce the gross taxable estate (i.e. Vermont) if the tax situs state taxes the real property. 2. Placing real property located in another state in a business entity may cause, in some case, the nature of the asset and thus the tax situs to change to the state of the business entity or domicile of the owner (known as equitable conversion).
E. COLORADO CAPITAL GAINS OR “REVENGE OF THE BUFFALOS”
Apparently Colorado, like some other states with a large volume of vacation homes, did
not like non-resident owners of properties in resort mountain areas leaving town with profits. Under Colorado law, the sale of Colorado real estate by a non-resident requires the closing agent to pay to the Colorado department of Revenue either 2% of the total sale price or the net proceeds of the sale, whichever is smaller. C.R.S. §39-22-604.5. The non-resident must then file a Colorado tax return if they want their money back. The payment is typically not necessary in a 1031 exchange. (See EXHIBIT #6)

VI. PROBATE
A. AVOIDING PROBATE FOR LOW VALUE REAL ESTATE
If a decedent has a parcel of real estate in Nebraska in their name that is worth less than
$25,000.00, then it is possible to distribute that property to the heirs without the necessity of filing a probate under Neb. Rev. Stat § 30-24,129, which states as folows:

Succession to real property by affidavit.
(a) Thirty days after the death of a decedent, any person claiming as successor to the decedent's interest in real property in this state may file or cause to be filed on his or her behalf, with the register of deeds office of a county in which the real property of the decedent that is the subject of the affidavit is located, an affidavit describing the real property owned by the decedent and the interest of the decedent in the property. The affidavit shall be signed by all persons claiming as successors or by parties legally acting on their behalf and shall be prima facie evidence of the facts stated in the affidavit. The affidavit shall state:
(1) the value of the decedent's interest in all real property in the decedent's estate located in this state does not exceed twenty-five thousand dollars. The value of the decedent's interest shall be determined from the value of the property as shown on the assessment rolls for the year in which the decedent died;
(2) thirty days have elapsed since the death of the decedent as shown in a certified or authenticated copy of the decedent's death certificate attached to the affidavit;
(3) no application or petition for the appointment of a personal representative is pending or has been granted in any jurisdiction;
(4) the claiming successor is entitled to the real property by reason of the homestead allowance, exempt property allowance, or family allowance, by intestate succession, or by devise under the will of the decedent;
(5) the claiming successor has made an investigation and has been unable to determine any subsequent will;
(6) no other person has a right to the interest of the decedent in the described property;
(7) the claiming successor's relationship to the decedent and the value of the entire estate of the decedent; and
(8) the person or persons claiming as successors under the affidavit swear or affirm that all statements in the affidavit are true and material and further acknowledge that any false statement may subject the person or persons to penalties relating to perjury under section 28-915.
(b) The recorded affidavit and certified or authenticated copy of the decedent's death certificate shall also be recorded by the claiming successor in any other county in this state in which the real property of the decedent that is the subject of the affidavit is located.
(See EXHIBIT #7 attached)
Similar to Nebraska law on transfer of real property of limited value by affidavit filed with
the recorder or deeds. The dollar value limit in Arizona is $50,000.00 in equity value. Also, in Arizona, a title company will typically accept the assessed value as opposed to fair market value (See EXHIBIT #8 attached).
Nebraska law also protects a subsequent purchaser of property which was distributed to the seller by affidavit. Under Neb. Rev. State § 30-24,130, “A successor named in an affidavit under section 30-24,129 shall have the same protection as a distributee who has received a deed of distribution from a personal representative.” However, the statute does further state, “Nothing in this section affects or prevents any proceeding to enforce any mortgage, pledge, or other lien upon the real property described in the affidavit.”
B. JOINTLY OWNED REAL PROPERTY
Typically a husband and wife will own real property as joint tenants with right of survivorship during their lifetime. In order to pass clear title to the survivor, a certified copy of the death certificate with the legal description of the property should be filed with the register of deeds. In addition, our office will typically file an affidavit of death along with the death certificate to clear up any estate or inheritance tax issues or questions concerning the surviving spouse’s identity. (See EXHIBIT #9 attached). No probate proceeding is necessary for jointly owned property. However, if jointly owned real property is not owned between a husband and wife, an inheritance tax determination will have to be made upon such property in order to clear title and release the liens placed upon such property under Neb. Rev. Stat. §77-2003and Neb. Rev. Stat. §77-2102.
C. FILING THE PROBATE
If a probate or trust administration in a county court in Nebraska involves real property,
a certificate evidencing the proceeding and describing the real estate must be filed within 10 days after describing the real estate in the proceeding with the Register of Deeds in the county where the real estate is located under Neb. Rev. State § 25-2708, which states as follows:
In any proceeding in the county court involving (1) the probate of wills, (2) the administration of estates, (3) the determination of heirs, (4) the determination of inheritance tax, (5) guardianships, (6) conservatorships, where real estate is any part of the assets of the estate or proceeding, or (7) trusts, where real estate is specifically described as an asset of the trust, the county judge before whom the proceeding is pending shall issue a certificate which shall be filed with the register of deeds of the county in which the real estate is located within ten days after the description of the real estate is filed in the proceeding. The certificate shall be in the following form:
This is to certify that there is pending in the county court of ............... County, a proceeding ...................................................................
(describe proceeding and name of person involved)
in which the following described real estate is involved, to wit:
...............................................................................
(describe real estate)
...................................
County Judge

C. TRANSFERRING REAL PROPERTY IN PROBATE
If an estate involves real estate, the personal representative has typically two choices with
respect to the distribution of the real estate. If the will does not specifically devise the real estate, the personal representative may sell the real estate to a third party at fair market value and distribute the proceeds to the heirs. This transfer is typically accomplished through the use of a Personal Representative’s Warrant Deed which is similar to a standard warranty deed (See EXHIBIT#10). If the will specifically devises the real estate or if the heirs do not desire it to be sold, the personal representative will sign a document called a “Deed of Distribution” to distribute the real estate “in kind” to the heirs (See EXHIBIT #11). With respect to the “Deed of Distribution”, Neb. Rev. Stat. § 30-24,105 states:
If distribution in kind is made, the personal representative shall execute an instrument or deed of distribution assigning, transferring, or releasing the assets to the distributee as evidence of the distributee's title to the property. If the distribution is of real property, the deed of distribution shall be recorded with the register of deeds in each county in which such real property is situated and shall indicate the court in which probate proceedings were conducted.

In an effort to protect a third party purchaser of such real estate distributed “in kind”, Neb Rev. Stat. § 30-24,108 states:
If property distributed in kind or a security interest therein is acquired by a purchaser or lender for value from a distributee who has received an instrument or deed of distribution from the personal representative, the purchaser or lender takes title free of any claims of the estate and incurs no personal liability to the estate, whether or not the distribution was proper. To be protected under this provision, a purchaser or lender need not inquire whether a personal representative acted properly in making the distribution in kind.



D. DISCLAIMER OF JOINTLY OWNED PROPERTY
A disclaimer is an irrevocable and unqualified refusal to accept the ownership of an interest in property. The effect of a disclaimer is to treat the interest in the disclaimed property as passing directly from the transferor of the property to the person entitled to receive the property as a result of the disclaimer. For example, if a decedent's will provides that the decedent's residuary estate passes to his wife and, if the wife is not then living, to his then living children, the wife's qualified disclaimer of her interest under the decedent's will has the effect of treating the wife as if she had predeceased the decedent. The result is that the disclaimed asset passes directly from the decedent to his children. The advantage in utilizing a disclaimer is that there is no transfer from the decedent to the wife followed by the transfer from the wife to the children. By skipping the wife in the above example, the gift or estate tax from the wife to the children is avoided.
In order for the disclaimer to be effective for federal estate and gift tax purposes it needs to be a "qualified disclaimer" as defined in 26 U.S.C. § 2518 and the related regulations. A qualified disclaimer must satisfy the following requirements: (i) be irrevocable and unqualified; (ii) be in writing; (iii) be delivered to the transferor of the interest, the transferor's legal representative, the holder of legal title to the property to which the interest relates or the person in possession of such property; (iv) be delivered no later than the date which is 9 months after the later of the date on which the transfer creating the interest in the disclaimant is made or the day on which the disclaimant attains age 21; (v) the disclaimant may not have accepted the interest or any of its benefits; and (vi) the interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.
In the case of jointly held property there are a few special rules. If the subject of the intended disclaimer is an interest in a joint tenancy with right of survivorship to which the disclaimant succeeds by operation of law, the qualified disclaimer of such interest must be made no later than 9 months after the death of the first joint tenant to die. The interest in a joint tenancy to be disclaimed is deemed to be one-half of the interest in the property even if the non-disclaiming co-tenant has contributed all the consideration for the property. (See EXHIBIT #12 sample disclaimer).
A disclaimer is a very flexible and useful post-mortem estate planning device, that requires careful planning within a short window of opportunity. The consequences of disclaimers need to be fully analyzed before they are set in motion. Full compliance with the technical requirements of 26 U.S.C. § 2518 as well as Nebraska law on Renunciation of Succession in Neb.Rev.Stat. § 30-2352 (30-2352 is attached as EXHIBIT #13) is necessary.
VII. CONCLUSION
Real estate can be a great investment with proper estate and income tax planning. The practitioner must be aware of the potential pitfalls such ownership may have both before and after the purchase and the options the client’s heirs may have after death.