If high estate tax exemptions sunset in 2026, more estates with substantial real estate holdings will face federal estate tax exposure. Now may be the time to take advantage of these exemptions and discuss gifting strategies and trust planning.
Charles R. Johnson, Wealth Director, Fiduciary Trust International
Scott Small, Trust Counsel, Fiduciary Trust International
If you own a second home, vacation property, or even a primary residence that has gone up in value, you may be considering taking action to capture and benefit from the appreciation. But what is the most tax-efficient choice from a wealth transfer planning perspective?
Should you sell now and use the proceeds to make gifts to your heirs? Should you gift the property? Should you keep the property and pass it on to your beneficiaries as part of your estate?
These questions may not be easy to answer, depending upon your circumstances. Below are the primary points to keep in mind as you evaluate your options.
Think About the Income Tax Implications
When property has gone up in value, the temptation is great to benefit from that appreciation by selling the property, especially with second homes or vacation properties that you may not use as often anymore as children grow up, move away, and begin their own busy lives.
But any sale of appreciated property has potential income tax costs. In 2025, capital gains taxes alone can be as high as 23.8%, and depending on your state of residence and the location of the property, your total tax impact could be much higher. For example, in California your proceeds could be reduced by as much as 36.1% after paying combined federal and state income taxes.
Planning Strategies Can Mitigate Income Taxes
The first thing to consider is whether to sell the property. If you continue to hold your property during your lifetime and pass it to your children or other heirs as part of your estate, under current law your heirs will receive a “step-up” in income tax basis.
From a tax perspective, your heirs are able to sell the property immediately following your death with no income tax assessment. Their income tax basis in the property will be equal to the fair market value of the property at the time of your death. The only income tax due would be attributed to any amount of appreciation that occurs between date of death and date of sale.
You may also consider putting off a sale and taking another look at how you can use the property. If you convert a property into your primary residence, you may currently exclude $250,000 of gain from income taxes (or $500,000 for a married couple) if you have used the property as your primary residence for two out of the previous five years.
Alternatively, if you convert the property into a rental property, then you may be able to exchange the property into another investment property of equal or greater value down the road, without recognizing capital gain.
Lastly, if you do decide to sell the property, you can look at your other investments, including marketable securities, to potentially harvest capital losses to offset the gain on the sale of the property.
Today’s High Estate Tax Exemptions May Be Cut in Half in 2026
From a tax perspective, a gift would likely only make sense if your assets will be subject to estate taxes. If your assets are under the estate tax exemption ($13.99 million per individual or $27.98 million for a married couple in 2025), a gift could actually be a poor decision for tax purposes because you achieve no savings from estate or gift taxes, and by gifting the property during your lifetime, you would be sacrificing the benefit of receiving the “step-up” in capital gains cost basis at your death.
If your gross taxable estate is going to exceed these transfer tax exemption amounts, however, you may obtain significant estate tax savings by making a gift. With an estate tax rate of 40%, those savings may more than offset the income tax implications of not receiving the “step-up” in basis, especially if you believe the property value will continue to appreciate.
It’s also important to remember that our current high estate tax exemptions are scheduled to sunset and revert to roughly half the current amounts in 2026 (with inflation adjustments). For high-net-worth individuals whose estates fall near the $7 million to $14 million range, depending on marital status, this presents a “use it or lose it” window.
There is a strong incentive to act before the end of 2025 to lock in today’s historically high exemptions by implementing gifting strategies or trust structures, particularly for appreciated real estate.
Gain Tax Advantages by Giving Partial Value Over Time
One strategy that may help mitigate gift and estate tax is to gift partial interests in a property. For example, you could give a 25% interest in a property to each of your four children. Alternatively, you could give a 25% interest in a property to a child one year and give other percentage interests in future years.
Complications exist when co-owning property with family members, but the value of a partial interest is typically subject to a discount of at least 20% off the pro rata share of the property’s value as a whole.
The lack of marketability and minority interest discounts may allow you to pass more value onto your beneficiaries while using less of your tax-free transfer exemption amount (or pay less gift tax if you’ve exceeded the exemption with past gifts).
Gift Your Property and Continue Living There
Finally, an option often used with vacation homes and sometimes even with a primary residence is a qualified personal residence trust (QPRT). A QPRT enables you to gift a residence into an irrevocable trust and retain the right to live in the residence for a period of years.
For estate tax purposes, the gift moves the residence and any future appreciation of its value out of your estate. The value of the gift is also reduced by the actuarial value of your retained right to live in the property for a term of years and by your retained right of reversion (that is, the right to have the property return to your estate if you die before the end of the term of years).
The longer the period or the older you are, the greater the reduction in the value of the gift, which can often be a planning opportunity for older clients who are in good health.
If you die during the period of the QPRT, the gift is nullified and the residence is included in your estate for estate taxes (along with the corresponding step-up in basis). But if you survive the period, the residence is passed onto your beneficiaries with significant tax savings.
With a narrowing window ahead, now may be an ideal time to consult with your estate and tax planning advisers. Taking action before 2026 could preserve valuable exemptions and unlock significant long-term tax efficiencies for your family.
Charles R. Johnson, Wealth Director, Fiduciary Trust International is responsible for developing investment and trust relationships with families and organizations. He works closely with the Trust and Tax planning group to help clients determine optimal asset allocation and transfer strategies.
Scott Small is Trust Counsel at Fiduciary Trust International, where he advises clients on estate planning strategies with a focus on tax-efficient wealth transfer.
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