Estate Planning

Real Estate Estate Planning: Transfer Wealth Tax-Efficiently

Preserve and Transfer Real Estate Wealth

Learn how to transfer real estate wealth to the next generation using stepped-up basis, valuation discounts, GRATs, and dynasty trusts while minimizing estate taxes.

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$15M

Permanent Estate Tax Exemption (OBBBA)

$30M

Married Couple Exemption

25-40%

Typical FLP Valuation Discount

Depreciation Recapture at Death

Quick Answer

Stepped-up basis at death eliminates ALL capital gains and depreciation recapture - heirs receive property at fair market value
Family limited partnerships and LLCs enable 25-40% valuation discounts for gift and estate tax purposes
OBBBA made $15M estate exemption permanent - focus on protecting appreciation and leveraging transfer strategies
GRATs transfer appreciation above IRS hurdle rate gift-tax-free - excellent for real estate
Coordinate estate planning with 1031 strategy - hold high-gain properties for stepped-up basis at death

The Opportunity

Estate Planning Strategies for Real Estate

Stepped-Up Basis at Death

When you die owning real estate, your heirs receive it at current fair market value (stepped-up basis). All accumulated capital gains and depreciation recapture are eliminated - never taxed. A $500K property with $50K basis becomes $500K basis for heirs. This is the ultimate tax elimination strategy.

Valuation Discounts for Entity Ownership

Transfer real estate through family limited partnerships (FLPs) or LLCs. Minority interests and lack of marketability create valuation discounts of 25-40%. Transfer $1M in real estate equity for $600K-$750K gift tax value. Maximizes wealth transfer within exemption limits.

Grantor Retained Annuity Trusts (GRATs)

Transfer appreciating real estate to GRAT. Receive fixed annuity payments for term. Appreciation above IRS hurdle rate (Section 7520 rate) passes to beneficiaries gift-tax-free. Works exceptionally well for real estate with predictable cash flow and appreciation potential.

Dynasty Trust for Multigenerational Wealth

Transfer real estate to dynasty trust. Trust owns property for multiple generations, avoiding estate tax at each generational transfer. Combine with valuation discounts and GST exemption. Real estate can grow tax-free for 100+ years in favorable trust jurisdictions.

Implementation

Proven Transfer Strategies

Family Limited Partnership with Annual Gifting

Contribute real estate to FLP. You retain general partner control. Gift limited partnership interests to children annually using gift tax exclusion ($18K per recipient) and valuation discounts. Over time, shift majority ownership to children while maintaining control. At your death, only remaining FLP interest is in estate.

Best for: Real estate investors with multiple properties who want to maintain control while shifting wealth to next generation.

Example:

Transfer $5M apartment building to FLP. You are 1% GP, 99% LP. Gift 5% LP interests annually ($250K value, ~$175K after discounts). Over 10 years, transfer 50% to children tax-free. Remaining 50% in estate at death gets stepped-up basis.

Installment Sale to Intentionally Defective Grantor Trust

Create Intentionally Defective Grantor Trust (IDGT) for children. Sell real estate to IDGT in exchange for installment note. Sale is income-tax-free (grantor trust). Future appreciation and income accrue to trust beneficiaries. You receive note payments during lifetime.

Best for: High-net-worth investors with appreciated real estate and desire to freeze estate value while transferring appreciation.

Example:

Create IDGT for children with $500K seed gift. Sell $5M property to IDGT for $4.5M note (after discount). IDGT pays you 5% annually. Property cash flow services the note. After 20 years: $5M+ value transferred to children, minimal gift tax used.

Qualified Personal Residence Trust (QPRT)

Transfer primary or vacation home to QPRT. You retain right to live there for specified term. At term end, property passes to beneficiaries. Gift value is deeply discounted due to retained interest. If you survive the term, property is out of estate. Continue 1031 exchanging investment properties; use QPRT for personal residences.

Best for: Investors with valuable personal residences or vacation properties they want to transfer at discounted values.

Example:

$3M vacation home transferred to 15-year QPRT. Gift value: ~$1M (67% discount). After 15 years, home passes to children. You can rent from children if desired. $3M+ removed from estate for $1M gift tax value.

Avoid These Pitfalls

Common Mistakes

Dying Without Step-Up Basis Planning

If you sell 1031 exchanged properties before death, you trigger all deferred gains. But if you hold until death, heirs get stepped-up basis eliminating all gains. Many investors sell too early, paying taxes that could have been eliminated with proper planning.

Failing to Use Annual Exclusion Gifts

You can gift $18K per person (2024) annually without using lifetime exemption. For real estate, gift FLP/LLC interests using valuation discounts. $18K can transfer $25K-$30K of real estate equity. Failing to use annual exclusions wastes transfer opportunities.

Not Coordinating with 1031 Strategy

Estate planning and 1031 exchange strategy must work together. Plan which properties to hold for step-up (high appreciation, low basis) versus which to exchange (repositioning for cash flow). Coordinate timing of exchanges with estate planning timeline.

Questions

Common Questions

Here are the most common questions we receive about this topic.

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All deferred gains from every 1031 exchange in your lifetime are eliminated at death. Example: Original property purchased at $200K, exchanged multiple times, now worth $2M with $200K rolled basis. At death: heirs receive $2M property with $2M basis. The $1.8M gain is never taxed. This is why 1031 exchange is a lifetime wealth building strategy.

The One Big Beautiful Bill Act (OBBBA) made the federal estate tax exemption permanent at $15 million per person ($30 million for married couples). This eliminates the 2025 sunset uncertainty. However, estates exceeding these thresholds still face 40% estate tax, and real estate often appreciates significantly over time.

Entity ownership (LLC, FLP) provides liability protection AND estate planning benefits through valuation discounts. However, single-member LLCs do not provide discounts - you need actual minority interests. Multi-member LLCs or FLPs with family members enable 25-40% valuation discounts for transfers.

Yes. Revocable living trusts allow full control during lifetime while avoiding probate. Irrevocable trusts (IDGT, GRAT, dynasty) remove assets from estate but can be structured to allow management through retained powers or trustee arrangements. Work with estate planning attorney to design appropriate structure.

Depreciation recapture is eliminated at death along with capital gains. If you claimed $500K in depreciation over your holding period, you would normally owe $125K (25% rate) at sale. At death: heirs receive stepped-up basis, and the $500K recapture is forgiven. This benefit alone justifies holding appreciated real estate until death.

Ready to Plan Your Real Estate Legacy?

With the $15M estate exemption now permanent, focus shifts to protecting future appreciation and leveraging transfer strategies. Let us help you preserve and transfer your real estate wealth.

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