Estate Planning for Negative CapitalEstate Planning for Negative Capital

Stephen M. Breitstone

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 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 of nonrecourse financings. Ultimately, such property will have a low income tax basis relative to its fair market value (FMV) and its nonrecourse encumbrances. Under the rule established by the U.S. Supreme Court in Commissioner v. ...