Real estate is more than just bricks and mortar — for many investors, it’s a cornerstone of legacy and wealth transfer. You may consider gifting your investment property to family or charitable causes as you plan for the future. While gifting can be a valuable estate planning tool, it’s important to understand how it impacts capital gains taxes — both for you and the recipient.
The Hidden Cost of a Gift: Carryover Basis
When you gift appreciated property during your lifetime, the recipient inherits your cost basis — not the asset's market value at the time of transfer. This is known as a carryover basis. For example, if you purchased a rental property decades ago for $250,000 and it’s now worth $850,000, the recipient will take on your original $250,000 basis. When they sell, they may face substantial capital gains taxes on the $600,000 gain.
It’s a surprising outcome for many, mainly when gifting is intended to reduce the family’s overall tax burden. Instead, the tax liability may be deferred.
Timing Matters: Lifetime Gift vs. Inheritance
There’s a key distinction between gifting during your lifetime and transferring assets at death. Assets that pass to heirs upon death generally receive a step-up in basis, resetting the property’s basis to its fair market value at the time of death. This step-up may eliminate or significantly reduce capital gains taxes if the property is sold shortly thereafter at or near that market value.
As a result, many investors strategically choose to hold appreciated assets until death, especially if capital preservation and tax efficiency are priorities.
Annual Exclusion and Gift Tax Limits
Each year, you can gift up to a certain amount per recipient without triggering gift tax reporting requirements — for 2025, that amount is $18,000 per person. Gifts above this threshold may require a gift tax return (IRS Form 709) and count against your lifetime estate and gift tax exemption, currently $13.61 million per individual.
While gifting can be part of a sound wealth strategy, it’s important to coordinate with tax and legal professionals to avoid unintended tax consequences — especially when property values are substantial.
Strategies to Consider to Minimize Tax Impact
Investment property owners have several options to gift assets while reducing tax exposure:
- 1031 Exchange Before Gifting: Consider executing a 1031 Exchange to defer capital gains, then gifting fractional DST interests. The recipient will still inherit the carryover basis within a more diversified, passive structure. DSTs must meet IRS requirements to qualify under 1031 rules.
- Gifting to Charitable Remainder Trusts (CRTs): CRTs may allow you to transfer assets, receive income over time, and generate a charitable deduction while bypassing immediate capital gains tax.
- Gifting Interests Over Time: Instead of gifting the entire property simultaneously, consider transferring fractional interests over several years, staying within annual exclusion limits.
The Realized Approach
At Realized®, we specialize in helping property owners evaluate tax-efficient strategies for real estate transitions. Whether you’re planning to gift real estate to your children or reposition it for generational income, our Investment Property Wealth Management® strategies are designed to support multigenerational planning.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
