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You may have heard of — and you may be anticipating — the coming wealth transfer. Over the next 25 years, anywhere from $80 to $100 trillion will shift from baby boomers to their heirs, the largest wealth transfer in history.1 About 24 percent of this wealth is tied to real estate — primary residences, vacation homes, rental properties, and commercial assets.2
While real estate can be a powerful tool for preserving generational wealth, it also presents challenges. Unlike stocks or cash, real estate is relatively illiquid, requires upkeep, and can be difficult to divide equitably among multiple heirs. Market fluctuations and tax implications add further complexity.
So, is real estate a wise vehicle for wealth transfer? The answer depends on careful planning, family dynamics, and the financial strategies used to manage the transition.
The pros of transferring real estate
Wealth preservation and appreciation. Real estate is seen as “the best long-term portfolio investment,” by 36 percent of US adults, beating out gold, stocks, bonds, and cryptocurrency.3 And if history is an indicator, people who inherit property will likely benefit from rising home values over the long term. Property appreciation over time can be a financial cushion or provide additional income if rented.
Tax benefits. One major advantage in passing down real estate is the step-up in cost basis. When an heir inherits a property, its tax basis resets to its current market value, reducing potential capital gains taxes on that property if sold later. While not unique to real estate, the step-up in cost basis is particularly advantageous given the long holding periods and significant appreciation usually involved.
“Timing and strategy are important here because to fully leverage the step-up benefit, the property must have been held in an estate prior to the owner’s passing,” said Jessica Pesce, founder of Pesce Law Office in Marlborough, Massachusetts.
Additional tax-saving strategies that may be available in real estate include:
· Cash-out refinancing: Owners can borrow against equity for investments, debt repayment, or education, with potentially tax-deductible interest, closing costs, and fees.
· Bonus depreciation (for rental properties): Accelerating tax deductions in the first year of ownership frees up cash for other uses.
· 1031 exchanges: These swaps allow owners to defer capital gains taxes by reinvesting sale proceeds into another income-producing property.
“A 1031 exchange can be the perfect way to reduce immediate tax challenges when planning to pass down real estate,” said Ira Sager CFP®, of Optimal Wealth in Sudbury, Massachusetts. “1031 exchanges defer the capital gains tax that would normally be assessed when selling a property to diversify the asset and end the owner’s landlord duties. When the original owner dies, the 1031 will still benefit from the step-up in basis for the heirs.”
Performing a 1031 exchange can also help resolve some of the cons of wealth transfer via real estate, which will be discussed below.
Income-generating potential. Rental properties or commercial real estate provide steady passive income, which can supplement other assets in a diversified portfolio or inheritance.
A long-lasting legacy. Beyond financial benefits, real estate often has sentimental value, serving as a family retreat or cherished gathering place. Many heirs prefer to retain vacation homes rather than sell them.
The cons of transferring real estate
Liquidity challenges. Real estate cannot be easily converted into cash, unlike stocks or savings. And a valuable home doesn’t always mean liquidity — heirs may struggle with mortgage payments, property taxes, and maintenance.
Division and fairness. Splitting a property between multiple heirs can lead to disputes.
For example:
· One heir wants to sell, another wants to keep the home.
· Some siblings can afford maintenance costs, others cannot.
· Distance matters — one heir may bear more responsibility.
“Without clear planning, disagreements over inherited real estate can lead to legal battles or forced sales. The worst outcome might be tension or animosity between family members,” said Pesce.
Tax implications and costs. While real estate offers tax benefits, high-value properties may trigger estate tax exposure. The federal estate tax exemption is $13.99 million per individual (2025), but estates exceeding this amount are subject to a 40 percent federal tax rate. And the current exemption levels may be subject to change soon. (Learn more: The estate planning question mark ahead)
Additionally, property tax reassessments in certain states could cause a significant increase in annual property taxes for heirs. Attorney Pesce advises that “this is where a well-documented estate plan can help minimize risks. The planning you do upfront pays dividends, literally.”
Management and maintenance burdens. Managing inherited properties can be time-consuming, especially for heirs juggling careers and families. What seemed like a great retirement project for the original owner may not be practical for heirs. Property upkeep and unexpected repairs require significant effort. And, in the case of rental properties, such demands can increase significantly. The difference here between securities and real estate is stark — your index fund never called saying the roof leaks. And rental income is taxable, and selling may trigger capital gains tax.
Volatility — market and geographic. Property values fluctuate based on economic conditions, interest rates, and location trends. This has implications.
· Selling during a downturn may yield a lower return.
· Unlike stocks, real estate can’t be sold instantly, limiting liquidity in uncertain times.
These challenges are significant. But there are strategies that can help address them.
1031 possibilities
The aforementioned 1031 exchanges — the swap of one real estate investment property for another with capital gains taxes deferred — can help address management and maintenance issues. Be aware, however, that 1031 exchanges can be complicated and you should consult a qualified tax advisor or accountant if you’re considering one.
“Here’s how a 1031 exchange can help,” said Sager. “A single-family home or duplex that doesn’t provide enough cash flow to support professional property management can be exchanged for one that does. For instance, selling the original property and placing proceeds into a multi-tenant apartment syndication where you receive quarterly distributions — and never have to worry about tenants, trash, or maintenance.”
For residential properties, a property manager’s fees typically range from 8 percent to 12 percent of monthly rent.4 A good manager does more than mow the lawn and collect rent; they can provide important guidance, keep the property fully rented, and increase property value. This is because cash flow influences rental property values, unlike residential properties, which are most often valued according to local comparable sales.
Such exchanges can also help heirs address market and geographic uncertainty.
"Again, a 1031 exchange is a useful tool,” Sager added. “Let’s say you inherited a vacation property in an area prone to natural disaster, and it’s either uninsurable or insurance is exorbitant. If you sell that property and purchase one elsewhere, you’ll reduce risk and insurance costs, defer capital gains tax, and still retain a vacation property. If your goal is a new investment that reduces risks due to natural disasters, a 1031 allows you to turn a concentrated geographical investment into one which is distributed into a range of safer regions around the country.”
Addressing real estate inequities
Because real estate can’t always be divided evenly, families must find ways to balance inheritances.
One effective strategy for such estate equalization situations is life insurance. Obviously, the death benefit from a life insurance policy can be used to help heirs and beneficiaries pay any mortgage payments, property taxes, or maintenance needed for an estate. But death benefit proceeds can also be used to help offset the dedication of a property or enterprise to a particular heir.
For example, say one heir inherits a family home. Any other heirs could receive a greater portion of the death benefit proceeds from a life insurance policy, avoiding disputes and forced property sales. (Related: Keeping heirs from fighting)
This strategy can also be used for passing on property central to an enterprise, like a farm, or a standalone business. (Related: Estate equalization for business owners)
A financial professional can provide guidance on using life insurance to address such potential situations. (Find a MassMutual financial professional here or let us know you’d like to talk to one.)
The cash-out refinance option is another possible answer. It allows heirs to hold on to the property and receive a portion of the property’s value as a loan. You can generally only cash out 70 percent to 80 percent of the home’s equity, at which point you’ll make monthly payments at prevailing mortgage rates.
For example:
· Sibling A wants to renovate the property.
· Sibling B prefers to sell the home as is.
· If there is enough equity, Sibling A can “cash-out” Sibling B, perform the renovation, and, hopefully, sell at a better price.
Strategies for transferring real estate
There are a number of ways to transfer real estate from one generation to the next. Some of the more common include:
Gifting during life. Some choose to gift property before death to reduce estate taxes. However, this may eliminate the step-up in basis, increasing capital gains exposure for heirs. (Related: Lifetime gifting pros and cons)
Using trusts. Some opt to place real estate in a revocable trust. This allows continued control while avoiding probate. Another option is an irrevocable trust, which may reduce estate tax exposure but requires the trust grantor to give up ownership rights. (Related: Types of trusts and what they are used for)
Creating a family LLC. A family limited liability company (LLC) allows heirs to own shares of a property rather than the property itself.
This provides:
· Centralized management, which can prevent disputes.
· Owners with the ability to sell or transfer shares instead of dealing with the complexities of joint ownership.
Estate planning attorneys, tax advisors, and financial professionals can offer invaluable guidance on which type of transfer could be best for particular situations. (Related: Wealth protection tactics)
Additionally, they can help make sure that property transfers and estate plans fit into an overall financial plan complete with appropriate documentation. Legal tools such as trusts, wills, and buy-sell agreements help prevent conflicts over real estate inheritance. Families could also designate a property manager or trustee to oversee assets and facilitate decision-making. (See: Guarding against problems for your heirs)
“A knowledgeable, impartial professional can remove pressure during an already emotionally charged time, ensuring that decisions are made objectively and in alignment with the estate plan’s intentions,” Pesce said.
Indeed, real estate planning should align with broader retirement and financial goals.
“Many of us have decades of experience protecting assets and developing sound strategies,” said Sager. “Real estate transfer has nuances, but we have tools to help.”
Conclusion
Real estate can be a powerful tool for wealth transfer, but it requires careful planning. While it offers financial stability, appreciation, and income potential, liquidity challenges, tax implications, and family disputes can create obstacles.
Estate equalization strategies, such as life insurance, trusts, refinancing, and structured asset division, help ensure a fair and conflict-free wealth transfer. Consulting financial professionals is key to creating a tailored plan that meets a family’s unique needs.
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