3 Estate Planning Secrets for Investment Properties

In the game of Monopoly (™), the person with the most properties in the end usually wins. In real life, having the most properties in the end could also mean paying the most in taxes. Let’s take a look at how to maximize your investments in real estate while minimizing your taxes.

Catch 22

Investment properties have a sort of Dr. Jekyll and Mr. Hyde effect on your estate. On the one hand, your heirs will receive a step-up in cost basis (we discuss this in more detail below), so no income taxes will be owed on the property (Sweet!). On the other hand, for a large estate, estate taxes will kick in at most likely double the income tax rate (Yikes!). Since estate taxes are owed 9 months after death, real estate may have to be sold quickly (sometimes below optimal prices) just to get the cash to pay the IRS.

If your investment properties are earning you a decent residual income, you may not want sell the properties now just to ensure your kids don’t get hit with an unfortunate estate tax dilemma. Here is what you can do now to protect your children (and your wealth) later:

  • Make a Swap (or a Few)

If you don’t want to hold onto the same property for life, you can actually sell it and buy another property without incurring taxes right away. This type of transaction is called like-kind exchange. Certain rules apply, so you must plan your exchange with a trusted professional. Bottom line is, as long as you purchase a property of equal or greater value, you don’t trigger capital gains taxes. But as soon as you sell it for cash, the tax is owed on the profits. If you have taken depreciation deductions on the property, your cost basis could be as low as $0, in which case the entire sale price is taxable!

The capital gains tax disappears if the property is held until death and then passed down to heirs. This is because of the step up in cost basis; for income tax purposes, the IRS will recognize the current value as the income to your heirs, but then the current value is also used as the cost to your heirs. The property income and cost cancel each other out, and no income taxes will be payable. For this reason, making a swap to avoid cashing out on the investment property is a good way patch up the proverbial ‘hole in the bucket’ (by avoiding capital gains taxes), but unfortunately it could open up a much bigger hole later (estate taxes).

  • Use your gifts

Under the new tax laws, the estate/ lifetime gift exemption limit is at an all-time high of $11million per individual and $22 million per couple. If you give your children the property outright, then they only have capital gains taxes to contend with (up to 20% for long term capital gains). This option avoids estate taxes (which could eat 40% of the pie). In this case, you’ve plugged up a huge hole (estate taxes), but you’re still leaking (capital gains taxes).

  • Cover your bases

If you don’t want to sell or gift the property now, there is a way you can pass down the property to your heirs and avoid forcing your children to sell just to pay estate taxes. First, hold onto the properties or swap them as needed. You can use the money you save on taxes to purchase a life insurance policy. The policy will not be subject to estate or income taxes as long as it is held within an irrevocable trust outside of your estate. You can plan so that the insurance policy proceeds will cover the costs of estate taxes on the properties. In this way, you eliminate the capital gains tax and pay for the estate tax. Your children can keep the property (with all its residual income) or sell the property at their leisure. This course of action plugs both holes (income and estate taxes) completely.


If you would like advice or help implementing a plan to minimize taxes through swapping, gifting or an irrevocable trust, give us a call. Our specialty is estate planning for high net worth individuals, and our team has nearly a century of collective experience in the financial services sector. It’s our goal to make a measurable impact in your financial life.

Note: the statements above should not be considered financial, legal or tax advice, but ideas for careful consideration with your trusted financial advisors and lawyers. For current tax or legal advice, please consult with an accountant or an attorney.


About Axia Global

For decades, Michael Roney (founder of Axia Global) has worked alongside top financial and legal professionals to craft profitable solutions for even the most complex wealth preservation and estate planning cases. Together, the team at Axia Global has nearly a century years of combined experience in the financial services sector.