Gifting Real Estate to Your Kids: Avoid Creating an Income Tax Problem

Gifting real estate to your kids can lower your estate tax and still leave them with a large income tax bill when they sell. The difference comes down to basis. It’s one of the most overlooked parts of year-end planning for real estate families.

During a recent episode of Your CPA’s Take on Real Estate, James Moore CPAs Daniel Roccanti and Kyle Paxton shared valuable insights on year-end gifting and estate planning. The discussion highlighted the importance of knowing exactly what you’re handing down when you gift property instead of cash.

Why Real Estate Families Gift Before Year-End

Real estate is one of the strongest tools for building generational wealth. Many of the families Daniel and Kyle work with want to pass that wealth to their children with as little tax as possible. Daniel noted that while 1031 exchanges help defer income tax, gifting “is a great way to defer estate tax.”

How the 2026 Annual Exclusion Works

Kyle explained that for 2026, the annual gift tax exclusion is $19,000 per recipient, or $38,000 for married couples filing jointly when both spouses use their exclusions. Gifts within that limit carry no IRS reporting requirement and don’t reduce your lifetime estate and gift tax exemption. They also don’t create a deduction on your own return.

For families with larger estates, Daniel was direct: “If you’re over that $30 million threshold, then you should really be gifting up to the annual limit every year.”

Non-Cash Gifts Have a Hard Deadline

Cash is the simplest gift. But many real estate owners want to bring their kids into the business by gifting LLC interests instead. That adds a step, since you’ll need a valuation or appraisal first.

“You need to complete the transfer before the end of the year,” Daniel said. “It can’t wait. There’s no deferral here.”

Appraisals take time. If a non-cash gift is part of your plan for this year, start now rather than in mid-December.

The Basis Problem Most Investors Miss

Here’s where gifting real estate gets tricky. When you give property away during your lifetime, your basis goes with it.

“When you gift, you’re also gifting your original basis,” Daniel said. “There’s no step-up basis in gifting.” He added that a step-up in basis comes when you die and your heirs inherit the property, not when you gift it.

That means you’re also passing along your income tax consequences. Your kids inherit the gain you never paid tax on, and they’ll owe it when they sell.

How Years of 1031 Exchanges Raise the Stakes

Kyle walked through an example. Under current law, investors can keep rolling properties through 1031 exchanges and defer tax on each sale. “Five 1031 exchanges down the line, my basis might be zero,” he said. If he gifts part of that property to his children, their basis is zero too.

Now compare that to holding the property until death. Kyle explained that if he’s under the lifetime exemption when he passes, his children receive a step-up in basis to fair market value. That’s why he sees 1031 exchanges as such an important estate planning tool, because “you can keep rolling that zero basis until you get that fair market value step up.”

Two gifts can carry the same $38,000 fair market value and leave your kids with very different tax bills. A cash gift has a basis equal to its value. A zero-basis LLC interest does not.

Gift the Right Assets, Not Just the Right Amount

Gifting is mainly an estate planning tool. Daniel was clear that it’s usually not a good income tax strategy, and that gifting highly appreciated property deserves a second look. As he put it, “You’re maybe helping an estate planning problem, but creating an income tax planning problem.”

Before year-end, decide which assets you plan to gift and why. Get any valuations started early. Then talk with your CPA about how each option affects both your estate and your kids’ future income tax.

If you’ve rolled a property through several 1031 exchanges and you’re thinking about adding your kids to the LLC this year, have that conversation before December.

Watch the full episode of Your CPA’s Take on Real Estate to hear Daniel and Kyle walk through gifting along with cost segregation timing, entity elections, retirement contributions and 1031 exchange deadlines.

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