Key Takeaways
- Estate planning for real estate transfers requires evaluating gifting strategies, step-up in basis rules and estate tax exposure to preserve multigenerational wealth.
- Lifetime gifting can reduce taxable estates and shift future appreciation, but recipients retain the original cost basis and may face higher capital gains taxes.
- Formal governance structures, including operating agreements, voting provisions and liquidity planning help reduce family disputes and forced property sales.
A significant wealth shift is already underway and real estate is right at the center of it. Over the next decade, an estimated $38 trillion in global wealth is expected to pass from older generations to younger ones, much of it in real estate. For many families, real estate holdings represent their largest and most meaningful assets.
Before making any decisions about transferring property, it’s worth stepping back and asking a few key questions:
- Do my heirs want to keep the property?
- How is the property currently owned: individually, in a trust or through an LLC?
- Is it more advantageous to retain the property for a step-up in basis at death, or to transfer it now and move future appreciation out of my estate?
- Should I consider gifting during my lifetime?
- Will my estate have enough liquidity to cover taxes without forcing the sale of key assets?
- What structure will govern the property once the next generation takes over?
For families with substantial real estate holdings, these items can have long-term financial and personal implications. Thoughtful planning with the right advisors can make a meaningful difference.
To Gift or Not to Gift
The current lifetime gift exemption is $15 million per person. Gifting assets during your lifetime reduces that exemption and the recipient retains your original cost basis. For example, if your property was purchased for $100,000 and is now worth $500,000, a gift would use $500,000 of your exemption. The recipient’s basis remains $100,000, meaning they would recognize a gain if they sell the property. The gain would be the difference between fair market value at time of sale and $100,000.
By contrast, holding the property until death generally results in a step-up in basis to fair market value. Using the same example, the heir’s basis would reset to $500,000, significantly reducing potential capital gains if the property is sold soon after inheritance.
Every situation is different and modeling these scenarios before taking action is essential. Depending on your goals, transferring real estate now either outright or through trusts or entities may allow you to:
- Lock in current exemption levels
- Shift future appreciation out of your taxable estate
- Take advantage of valuation discounts in certain structures
Liquidity Risk
Estates with substantial real estate can present challenges at death. Administrative responsibilities alone can be burdensome, especially during an already difficult time for families.
More importantly, estate taxes may come due without sufficient liquid assets to cover them. Without proper planning, which may include life insurance, this can force the sale of property, sometimes at unfavorable times or prices, simply to meet tax obligations.
Family dynamics can also complicate matters. With multiple heirs, it’s not uncommon to see differing opinions on whether to hold or sell properties. These issues are far easier to address proactively than in the moment.
Planning Prevents Conflict
When multiple family members inherit real estate without a clear plan, disagreements are common, particularly when the property requires active management.
Beyond tax considerations, families should think through practical issues, such as:
- Ongoing maintenance and capital expenditures
- Emotional attachment to certain properties
- Differences in financial situations among heirs
- Whether to retain or sell assets
- Imbalances in effort versus ownership
To help avoid conflict, many families put formal structures in place, including:
- Operating agreements with buyout provisions
- Defined decision-making and voting processes
- Clear cost-sharing arrangements
- Documented exit strategies
- Regular family meetings to review major assets
Final Points
Before making any decisions, it’s critical to understand what your real estate holdings are worth today. A formal valuation will be required for gifting, but even an initial estimate can help guide early discussions.
Given the scale of real estate expected to change hands in the coming years, now is a good time for families to take a closer look at their portfolios. Those who plan ahead tend to be in a much stronger position to preserve wealth across generations.
Contact Us
Our team at PKF O’Connor Davies can help you evaluate your options and develop a plan that aligns with your goals, both tax-efficient and practical, so your legacy is preserved for years to come. If you have questions, please contact your client service team or:
Celina C. Carter, CPA
Partner
ccarter@pkfod.com
Sarah A. Guilmette, CPA
Partner
sguilmette@pkfod.com