As baby boomers begin to pass on their wealth, an estimated $80 to $100 trillion will be transferred to the next generation over the next 25 years. A significant portion of this wealth is tied to real estate—homes, rental properties, vacation homes, and commercial assets. While real estate can be an excellent tool for preserving wealth across generations, it also comes with its share of challenges. Here’s what you need to know about using real estate as part of your wealth transfer strategy.

The Benefits of Transferring Real Estate

1. Wealth Preservation and Appreciation
   Real estate has long been considered one of the best long-term investments. Many Americans view it as a solid alternative to stocks, bonds, and even cryptocurrencies. With real estate values generally rising over time, inheriting property can serve as a financial cushion for future generations. Additionally, rental properties can provide steady income, offering heirs financial stability.
2. Tax Benefits
   A major advantage of transferring real estate is the “step-up in basis” rule. When property is inherited, its tax basis is adjusted to its market value at the time of the owner’s death. This helps reduce potential capital gains taxes if the property is sold later on. For example, property that has appreciated over time will be taxed at a lower rate, potentially saving the heir significant amounts in taxes. However, to fully leverage this benefit, the property must be part of the estate when the owner passes away.
3. Income Potential
   Rental properties or commercial real estate can generate consistent passive income, which can be a useful supplement to other assets or income sources. This can be particularly beneficial when diversifying your portfolio or for heirs who are seeking a reliable income stream.
4. Sentimental Value
   Beyond financial considerations, real estate often holds emotional value. Family homes or vacation properties can serve as cherished gathering places, and many heirs prefer to retain these properties rather than sell them. This sentimental attachment can be an important aspect of wealth transfer.

Challenges of Transferring Real Estate

1. Liquidity Issues
   Real estate is not as liquid as other assets like stocks or cash. Even though a property might have substantial value, heirs may face difficulties paying for ongoing costs such as property taxes, maintenance, or mortgage payments. If the property is sold, it might not be possible to access the funds immediately, especially if market conditions are unfavorable.
2. Fairness and Division
   When multiple heirs are involved, splitting a property can lead to disagreements. For example, one heir may want to sell the property, while another prefers to keep it. Financial inequalities between siblings, such as the ability to pay for maintenance or upkeep, can cause additional tension. Without clear planning, these disagreements can escalate, sometimes leading to costly legal battles.
3. Tax Implications
   Although real estate can offer tax benefits, it can also lead to significant estate tax exposure. If an estate exceeds the federal exemption threshold of $13.99 million (as of 2025), it may be subject to a 40% tax rate. Additionally, property tax reassessments in certain states can increase the annual tax burden on heirs. This is why proper estate planning is critical to minimizing tax liabilities and ensuring that the transfer is as smooth as possible.
4. Management and Maintenance
   Inherited properties require ongoing management. For heirs who are already juggling careers and families, managing real estate can become burdensome, especially if the property is a rental. The time and effort involved in maintaining a property, dealing with tenants, and handling repairs can be overwhelming. Unlike stocks or bonds, real estate demands active involvement.

Strategies to Address Real Estate Challenges

One effective way to deal with some of these challenges is through 1031 exchanges. This strategy allows an heir to defer capital gains taxes by reinvesting the proceeds from the sale of a property into another income-producing property. For example, a single-family home or duplex could be exchanged for a multi-tenant property that provides better cash flow and requires less hands-on management. This helps reduce the financial burden on heirs and minimizes the tax implications of selling inherited real estate.

A 1031 exchange also allows for geographic diversification. For example, if an heir inherits a property in a high-risk area prone to natural disasters, they can exchange it for a more stable investment in a safer location. This can help mitigate risks while maintaining the property’s value.

Using Life Insurance for Estate Equalization

Because real estate is not easily divisible, some families turn to life insurance as a tool for equalizing inheritances. The death benefit from a life insurance policy can be used to help an heir cover property-related expenses, such as mortgage payments, taxes, or maintenance costs. This can be especially useful when one heir inherits a property and others do not. Life insurance provides a way to balance the wealth distribution, ensuring fairness and reducing potential conflicts among heirs.

Conclusion

While real estate can be an essential part of a wealth transfer strategy, it’s important to plan carefully to address the challenges associated with property management, taxes, and fairness among heirs. Strategies like 1031 exchanges and life insurance can help mitigate these challenges and ensure that real estate remains a valuable asset in the transfer of wealth. Working with an estate planning professional is crucial to navigating these complexities and making sure your property is passed on according to your wishes.