Transferring real estate to your children or loved ones can be a meaningful way to preserve family legacy and build generational wealth. But if not handled properly, the process can come with a hefty tax burden—capital gains taxes, gift taxes, reassessment under Proposition 19, and more. Fortunately, with smart estate planning, you can structure real estate transfers in a way that minimizes or eliminates these tax consequences altogether.
Understanding the legal tools available to you is key to protecting your assets and ensuring your property benefits the next generation without causing financial stress.
Why Real Estate Transfers Trigger Taxes
Real estate transfers are not as simple as handing over the keys. Any change in ownership can trigger federal or state tax consequences depending on how the transfer is structured.
Common tax burdens include:
- Gift Tax: If you gift real estate during your lifetime, the value of the property may exceed annual or lifetime gift tax exemptions, triggering IRS reporting and possible tax liability.
- Capital Gains Tax: If a property is transferred while you’re alive and then sold by the new owner, the original purchase price (or “basis”) is carried over, possibly leading to significant capital gains taxes.
- Property Tax Reassessment: In California, changes in ownership often trigger reassessment of property taxes, potentially increasing the annual property tax bill under Proposition 13 and Proposition 19.
- Estate Tax: If you pass away with high-value real estate and no tax-efficient plan in place, your estate may owe federal estate taxes—especially if it exceeds the exemption threshold.
Each of these can drastically reduce the value of your gift or inheritance if not properly planned for.
Smart Strategies to Avoid the Tax Burden
While tax laws can be complex, there are several proven strategies to transfer real estate while minimizing or avoiding tax consequences altogether. Here are the most effective approaches:
1. Step-Up in Basis at Death
One of the most powerful tax-saving tools is the step-up in basis rule. When someone inherits property after the owner’s death, the value of the property is “stepped up” to its fair market value at the time of death. This means if your children sell the property, they likely won’t pay capital gains tax on appreciation that occurred during your lifetime.
Why it matters:
If you bought a home for $200,000 and it’s worth $900,000 when you pass, your heirs receive the home with a new basis of $900,000. If they sell it immediately, they pay little to no capital gains tax.
How to preserve it:
Avoid gifting property during your lifetime if the goal is to minimize capital gains for your heirs. Instead, transfer real estate through a revocable living trust or will so they receive the step-up in basis upon your death.
2. Use of a Revocable Living Trust
A revocable living trust allows you to maintain control of your property during your lifetime while ensuring a smooth and private transfer after your death. It avoids probate, preserves the step-up in basis, and allows for clear instructions regarding how property is handled and distributed.
Bonus benefit:
It also helps prevent family disputes and delays that often occur during probate court proceedings.
3. Parent-Child Exclusion from Property Tax Reassessment
In California, Proposition 19 changed how real estate is reassessed when transferred between parents and children. However, there are still limited exclusions from reassessment that can apply if:
- The child moves into the inherited home as their primary residence
- The value of the property does not exceed a certain cap
Important note:
Prop 19 significantly limited the property tax benefits that were previously available under Prop 58, so it’s critical to plan accordingly. If your goal is to preserve the low property tax basis, speak to an estate planning attorney about whether your property qualifies under current rules.
4. Lifetime Gifting and the Unified Credit
The IRS allows individuals to gift up to a certain amount annually ($18,000 per person in 2024) without incurring gift tax. You can also use your lifetime gift and estate tax exemption—currently over $13 million per person (as of 2024)—to make tax-free gifts of larger amounts.
When to consider gifting:
If your estate is expected to exceed the estate tax exemption in the future, gifting property during your lifetime may be part of a smart tax-reduction strategy. However, this strategy must be weighed against the potential loss of the step-up in basis.
5. Qualified Personal Residence Trust (QPRT)
A Qualified Personal Residence Trust allows you to transfer your home to your children while still living in it for a set number of years. This freezes the property’s value for estate tax purposes and removes it from your taxable estate—making it an effective wealth transfer tool for high-value properties.
Caution:
This strategy is best used under specific conditions and with the help of an experienced estate planner, especially given that you relinquish full ownership after the trust term ends.
6. Using LLCs for Investment Properties
If you own rental or commercial property, placing it into a Limited Liability Company (LLC) can offer both liability protection and estate planning benefits. LLC interests can be transferred to children over time using the annual gift exclusion or through your trust upon death.
Benefits:
- Reduces personal liability
- Allows fractional gifting over time
- Provides management control during your lifetime
- May allow valuation discounts for estate tax purposes
7. Charitable Remainder Trusts and Real Estate
For those interested in philanthropy, a Charitable Remainder Trust (CRT) can allow you to donate appreciated real estate, receive an immediate charitable deduction, avoid capital gains tax, and still receive income from the property during your lifetime. After you pass, the remaining assets go to a charity of your choice.
Mistakes to Avoid
When it comes to transferring real estate, mistakes can be costly. Common errors include:
- Gifting property during life without understanding tax consequences
- Not updating your estate plan after purchasing or refinancing property
- Failing to title property correctly in your trust
- Assuming Proposition 19 offers full tax protection
- Ignoring the impact of capital gains when using lifetime gifts
Tax laws are ever-changing, especially in California. What worked five years ago may not work today.
How we can help
At Allenby Law, we focus on simplifying estate planning while protecting your financial future. Real estate is often your most valuable asset, and how you transfer it matters—not just legally, but financially.
We help San Diego families:
- Structure revocable trusts to ensure tax-efficient transfers
- Navigate Proposition 19 and protect their low property tax base
- Use smart gifting strategies without triggering unnecessary taxes
- Evaluate the pros and cons of using LLCs or QPRTs
- Avoid capital gains and estate tax surprises through proactive planning
Our firm is committed to planning the smart way—ensuring that your real estate stays in your family, protected and preserved. We don’t believe in one-size-fits-all planning. Your property, family, and legacy deserve personalized attention.
Schedule a consultation with Allenby Law to discover how we can help you transfer your real estate assets without the tax burden—while keeping your plan simple, smart, and stress-free.
