Introduction
If you own real estate, you’re likely thinking about how to protect your wealth for future generations. The Inflation Reduction Act, also known as OBBB, brought some changes that impact estate and gift taxes, making it important to review your real-estate succession planning.
The good news? The estate tax exemption for 2025 remains relatively high, but the rules around how it phases out and how you pass on property have some nuances. This blog walks you through the updated exemption amounts, how to use tools like 1031 exchanges and the step-up in basis, the pros and cons of gifting versus holding property, and common trust structures used to protect your assets.
If you want to safeguard your real estate wealth while optimizing your tax benefits, this guide will help you understand the essentials, explained simply.
New Exemption Amount & Phase-Out
The federal estate tax exemption is the amount you can pass on without your estate owing federal estate taxes. For 2025, the exemption amount is set at $13.61 million per individual (IRS, July 2025). This means a married couple could potentially transfer over $27 million before estate taxes apply.
However, the exemption is set to gradually phase out starting in 2026, dropping back toward pre-2018 levels unless Congress acts to extend the higher limits.
What Does the Phase-Out Look Like?
| Year | Exemption Amount (Individual) | Phase-Out Threshold Starts |
| 2025 | $13.61 million | N/A |
| 2026* | ~$6 million (expected) | Starts phasing at $6 million |
*Projected based on current law
This phase-out means more estates may become subject to federal estate taxes in coming years. Planning now can help minimize surprises for your heirs.
Why It Matters for Real Estate Investors
Real estate often makes up a large portion of wealth for investors and families. Without proper planning, a significant part of your estate could be lost to taxes, especially if property values rise or you hold bonus depreciation–eligible property that lowers current taxes but increases future estate value.
According to a recent IRS report, estates valued over $5 million accounted for over 70% of total estate taxes collected in 2024 (IRS, July 2025).
Using 1031 + Step-Up in Basis
Two powerful tools in real estate planning are the 1031 exchange and the step-up in basis.
What Is a 1031 Exchange?
A 1031 exchange lets you defer capital gains taxes by swapping one investment property for another “like-kind” property. It’s a way to grow your portfolio and defer taxes at the same time.
As per the report, the replacement property 45-day rule means you must identify potential replacement properties within 45 days of selling your original property. Timely action is key to staying within safe-harbor 1031 timelines.
How Does the Step-Up in Basis Help?
When you pass property to your heirs, the tax basis “steps up” to its fair market value at the time of your death. This means heirs can sell the property immediately without owing capital gains on appreciation that occurred during your lifetime.
Combining a 1031 exchange with this step-up can multiply tax benefits:
- Use 1031 exchanges during your lifetime to defer gains and grow your portfolio with properties like NNN property for sale or single-tenant NNN investment.
- Upon death, heirs receive a stepped-up basis, potentially eliminating capital gains taxes on past appreciation.
Gifting vs Holding — Pros & Cons
When thinking about passing on real estate wealth, you can either gift property during your lifetime or hold it until death. Both approaches have advantages and drawbacks.
| Strategy | Pros | Cons |
| Gifting | Reduces your taxable estate immediately; you may use annual gift tax exclusions; allows younger heirs to start managing property earlier | Gifts over the lifetime exemption reduce your estate tax exemption; potential capital gains tax burden for heirs remains if property is sold later |
| Holding until death | Step-up in basis benefits heirs by resetting property value; no immediate gift tax impact | Estate may owe taxes if total estate exceeds exemption; complex planning needed to avoid large tax bills |
Gifting works well for transferring properties early, especially if you want to shift wealth while you can see heir’s benefit. Holding works best if you expect property values to rise and want to maximize step-up basis.
Trust Structures Overview
Trusts are key estate planning tools that can protect real estate wealth, control asset distribution, and minimize taxes. Here is some common trust structures used in real estate succession planning:
Revocable Living Trust
- You control assets during your lifetime.
- Avoids probate, speeding up transfer to heirs.
- Doesn’t protect from estate taxes but provides privacy.
Irrevocable Trust
- Transfers assets out of your estate, reducing estate tax exposure.
- You give up control but can set specific terms for asset management.
- Can shelter assets from creditors.
Qualified Personal Residence Trust (QPRT)
- Transfers your home to heirs at a reduced gift tax value.
- You can continue living in the home for a set period.
- Good for highly appreciated properties.
Dynasty Trust
- Allows assets to pass across multiple generations without estate tax each time.
- Ideal for preserving wealth long-term.
| Trust Type | Control Retained | Estate Tax Benefit | Probate Avoidance | Best For |
| Revocable Living Trust | Yes | No | Yes | Avoiding probate, privacy |
| Irrevocable Trust | No | Yes | Yes | Reducing estate tax, creditor protection |
| QPRT | Limited | Yes | Yes | Primary residence with appreciation |
| Dynasty Trust | No | Yes (long term) | Yes | Multi-generational wealth transfer |
Consult an estate attorney to determine which trust fits your goals best.
Frequently Asked Questions
What is the estate tax exemption amount for 2025?
The federal estate tax exemption for 2025 is $13.61 million per individual. Estates valued below this amount generally won’t owe federal estate taxes.
How does a 1031 exchange help with estate planning?
A 1031 exchange lets you defer capital gains taxes when swapping investment properties, allowing you to grow your portfolio tax-efficiently. At death, heirs get a step-up in basis, potentially eliminating deferred gains tax.
Should I gift real estate to my heirs or hold it until death?
Gifting reduces your taxable estate immediately but uses your lifetime exemption. Holding until death offers step-up in basis for heirs but could increase estate tax liability. Your choice depends on your financial goals and family situation.
What types of trusts are best for protecting real estate wealth?
Revocable living trusts help avoid probate, irrevocable trusts reduce estate taxes, QPRTs are good for primary residences, and dynasty trusts preserve wealth for multiple generations.
What is the “replacement property 45-day rule” in a 1031 exchange?
After selling your original property, you have 45 days to identify potential replacement properties for a valid 1031 exchange. Missing this deadline can disqualify the tax deferral.
How will the phase-out of the estate tax exemption affect my planning?
The exemption is set to drop significantly in 2026, meaning more estates will owe taxes. Early planning can help you use gifting, trusts, and exchanges to reduce taxable estate value.
Can bonus depreciation increase my estate tax burden?
Yes, bonus depreciation can increase your property’s adjusted basis, which may increase the value of your estate. Proper planning is needed to balance current tax savings with future estate tax exposure.
Conclusion
The OBBB’s permanent $15 million exemption is a big win for property owners. If you want to build a legacy of wealth with smart real estate investing, consider exploring 1031 exchange properties for sale or DST 1031 listings under $1M to diversify your portfolio with stable passive net-lease income properties.
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DISCLAIMER
I am not a CPA, attorney, broker-dealer, or investment adviser. This content is for general education and must not be relied upon for tax, legal, or accounting advice. Always consult your licensed professional. Federal and state rules change frequently; info may become outdated. Circular 230 Notice: Nothing here is intended for, nor can it be used for, avoiding U.S. tax penalties.
Advertising Disclosure. Posts may reference services offered by AMC Real Estate Investment Services and affiliates, including 1031DealHub.
Forward-Looking Statements. Any opinions or projections are based on current data and may change without notice.
