Maximize the Gift Tax Exemption Before 2026

As the expiration of the Tax Cuts and Jobs Act (TCJA) approaches, real estate developers and investors may want to consider leveraging the current elevated gift and estate tax exemptions.

The TCJA doubled these exemptions, allowing individuals to transfer up to $13.6 million tax-free and couples up to $27.2 million. In 2026, these limits will revert to approximately $7 million per individual and $14 million per couple, adjusted for inflation.

For those who plan to pass significant assets to their heirs, this is an unprecedented opportunity to maximize tax-free transfers before the exemption amount is halved.

Why Real Estate is Ideal for Gifting

Real estate assets present unique advantages when it comes to gifting due to their typically appreciating value and the use of structures like LLCs and partnerships. These entities allow owners to transfer ownership interests rather than outright property, facilitating valuation discounts that can lower the taxable value of a gift.

The strategic gifting of LLC or partnership interests provides multiple benefits:

• Asset Appreciation Exclusion: By gifting appreciating real estate assets, future growth is removed from the estate, reducing potential estate tax liability.
• Valuation Discounts: LLC and partnership interests often qualify for valuation discounts, further lowering the reportable gift value and maximizing the exemption amount.

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Understanding Valuation Discounts and Closely Held Entities

Real estate investments structured as LLCs or partnerships provide the opportunity to apply discounts based on the lack of marketability and minority interest in the entity. Here’s how these discounts can benefit real estate investors:

Minority Interest Discount

If an individual gifts a minority share in a real estate entity—such as a 49% interest—its value is considered lower than a proportional share of the entire asset. This reduction reflects the limited control a minority interest holder would have, allowing for a lower taxable value.

Lack of Marketability Discount

LLCs are not publicly traded, making them harder to sell on an open market. This lack of liquidity justifies further discounts, which reduce the reported gift value and the amount of lifetime exemption used.

These valuation techniques can be particularly advantageous for developers and investors who hold real estate assets in closely held LLCs. By transferring a fractional interest in these entities, the total value is lowered, thus preserving more of the lifetime gift exemption.

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Gifting Interests in LLCs vs. Direct Real Estate Transfer

While it’s possible to gift real estate outright, transferring an ownership interest in an LLC or partnership can offer a more flexible approach. Here are some considerations for real estate professionals when evaluating their options:

Mortgage and Debt Considerations

Gifting real estate properties with outstanding mortgages may require lender approval, potentially complicating the transfer. Transferring LLC or partnership interests does not trigger the same requirements, simplifying the process.

Control and Flexibility

Gifting an interest in an LLC or partnership allows the original owner to retain some control or management over the asset if structured appropriately, which may be beneficial for ongoing projects or developments.

Key Reasons to Act Now

With the TCJA’s sunset in 2026, the current $13.6 million individual exemption will shrink substantially, making this a use-it-or-lose-it scenario for those with large estates or high-value real estate portfolios. Here are some actionable steps real estate professionals can take:

• Estate Tax Efficiency: By gifting now, you make full use of the higher exemption, reducing your estate’s tax burden. When exemptions are lowered in 2026, holding off could mean higher estate taxes on future transfers.
• Appreciation Benefits: Any appreciation on the gifted assets after the transfer is excluded from your estate, preventing the tax liability from ballooning with the asset’s value.
• Legacy Planning: Early gifting allows family members or chosen beneficiaries to participate in property or asset management, potentially easing the transition process.

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Considerations for Real Estate Investors

It’s important to determine the right approach to gifting based on your personal circumstances. Holding assets in an LLC or partnership offers a structured means to pass on property, and benefits the giver by minimizing estate tax implications.

Now is the time to consider gifting real estate holdings to take advantage of the expiring exemption.