Estate Taxes and Real Estate in Sister States
Many Coloradoans are transplants from the East and West Coast. While Colorado does not have an estate tax or inheritance tax, other states do. You do not have to be a resident of these states to get clipped by the tax. All you need is real estate.
Estate tax is a tax on the decedent’s estate. Inheritance tax is a tax levied on the assets based upon the heir’s relationship to the decedent (spouse, child, friend, etc.). At last count, there were about fifteen states with and estate tax, six states with an inheritance tax, and two states (Maryland and New Jersey) with both.
Most people understand that if they are a resident of a state, they are subject to that state’s taxing system. Traditionally, residency means having a permanent place of abode in a state and being present for more than six months. Domicile is the place where a person has a permanent place of abode and intends to return. Actual residence is not necessarily domicile. While this is a conversation for another day, some states are getting more aggressive about claiming high net worth individuals are a resident of or domiciled in the state.
Even if an individual is not a resident of or domiciled in a state, the individual and their heirs can be taxed at death. The most common example is ownership of real estate. Real estate is a form of real property. The broad property categories are real property (e.g., your house), personal property (e.g., your car) and intangible personal property (e.g., your bank account). If you own real property in a state with an inheritance or estate tax, most likely there will be a tax levied at death. Typically, it is a fraction of the tax based upon the percentage value of assets located in that state.
Avoiding the tax can be difficult. The most common method to avoid the tax is by converting real property into intangible personal property. For example, placing real estate in an entity like an LLC will typically convert its classification to something other than real property. However, some states require that it is a bona fide LLC and not just a tax avoidance technique. Further, certain income tax and property tax advantages can be lost.
If you own real estate outside of Colorado, figure out in advance whether the real estate can trigger estate or inheritance taxes. If you own real estate in a state with estate or inheritance taxes, consider options like and LLC to reduce or avoid the tax.
