Your real estate, heirs, and estate tax changes: What to know

Housing complex with roof gardens.

Upcoming changes to the estate tax landscape could impact your plans to leave real estate to future generations. Here’s what to consider now.

Families of wealth may consider real estate to be an ideal asset to pass along to future generations — it can be a fundamental part of creating generational wealth. Many sophisticated real estate investors already take advantage of the capital gains tax deferral strategies offered by the 1031 like-kind exchange. However, pending changes to the federal estate and gift tax exemption could create large liabilities for beneficiaries in line to inherit significant real estate portfolios.

Brandon Skaggs, senior trust real estate and specialty assets advisory specialist at Wells Fargo Wealth & Investment Management, shares an example of a client who had built up a large real estate portfolio with plans to transfer it to future generations. The assets composed 90% of his estate’s total value — and in today’s environment, that could be a problem.

“If he passed away today, his heirs wouldn’t have the cash to cover the estate tax burden,” Skaggs explains.

At the same time, Skaggs says there are steps you can take to help minimize estate taxes and preserve real estate assets. Smart planning, including taking advantage of a favorable tax window that may close at the end of 2025, can be a big part of the equation. Here’s what to know — and what to consider.

Pending reductions to the federal estate and gift tax exemptions

The 2017 Tax Cuts and Jobs Act doubled the size of the exemptions for federal estate and gift taxes. For 2024, the first $13.61 million in estate value is exempt from the federal 40% estate transfer tax.

What’s important to know: The federal estate and gift tax exemptions are set to revert to 2017 levels (adjusted for inflation) at the end of 2025, barring any further congressional action. That could cut the exemptions roughly in half, potentially causing estate tax liabilities to increase.

“If that cut happens, there could be a large number of individuals put in a new estate tax situation,” Skaggs says. But making certain tax moves now could help minimize those liabilities.

Tax-smart real estate moves

Skaggs recommends that individuals and families with significant real estate holdings discuss the following strategies with their advisors:

Consider gifting now. When gifting real estate, its value is based on how much it’s worth at the time the gift is given. Giving it away now could have the advantage of minimizing potential tax liabilities on future increases in value, as well as reducing the size of the current estate (which may mean less estate tax liability in the future).

Consider putting real estate into a trust. Putting real estate assets into a trust will allow heirs to avoid probate. Skaggs says it can also help protect real estate from unforeseen threats, such as lawsuits and divorce settlements. In a divorce, for example, a spouse might be entitled to a portion of any real estate assets, but having those properties in a trust may mitigate that risk.

Real estate questions to consider

Skaggs recommends that individuals with extensive real estate holdings ask themselves these questions to gauge how prepared they are for upcoming tax changes:

Will your heirs have enough cash for taxes? Families and individuals with large real estate holdings often have these investments make up a higher percentage of their total assets. That can pose a problem for heirs who end up owing estate taxes, Skaggs says. Without significant liquid assets in the estate, there may not be enough cash to pay estate taxes. And that could force heirs to sell off real estate assets to satisfy tax liabilities.

Have you provided guidance for managing the portfolio? Many real estate investors end up owning a collection of properties they are proud of and want to preserve for future generations. But failing to put guidance into trust documents about how to manage those assets — whether and when real estate should be sold, for example — may leave the portfolio open to future disruption.

Does your trustee have strong real estate experience? Stephen Thomas, senior trust real estate and specialty assets advisory specialist at Wells Fargo Wealth & Investment Management, notes that not all trustees are experienced in managing real estate or have the time to do it. Managing real estate requires knowledge of commercial real estate market conditions, developing and carrying out strategies to help optimize cash flow, and more.

Next steps

With the current federal estate and gift tax exemption scheduled to sunset at the end of 2025, families with large real estate portfolios should consider discussing the impact of these changes and potential strategies with their legal, tax, and financial advisors.

Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

Trust Services are available through Wells Fargo Bank, N.A. Member FDIC and Wells Fargo Delaware Trust Company, N.A. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.