Real Estate Tax Calc
What changed
The One Big Beautiful Bill Act (OBBBA, P.L. 119-21, signed July 4, 2025) permanently raised the federal estate and gift tax exemption to $15 million per person ($30 million per married couple) beginning in 2026, indexed for inflation in future years. Prior to the OBBBA, the Tax Cuts and Jobs Act exemption of roughly $13.6 million (2024) was scheduled to sunset at the end of 2025 and revert to approximately half that level under pre-TCJA law. The OBBBA prevented that sunset and set a higher permanent floor. The top estate tax rate remains 40% on amounts above the exemption.
Sources: CBIZ, “2026 Real Estate Tax Opportunities for Investors and Property Owners”; Schaaf CPA, “Real Estate Investor Tax Guide 2026: What the One Big Beautiful Bill Changed”.
Why it matters to investors
For real estate investors, the estate tax exemption interacts directly with one of the most powerful rules in the tax code: the stepped-up basis at death under IRC § 1014. When an investor dies holding appreciated property, heirs inherit it at its fair market value on the date of death, not at the decedent’s original cost. That reset wipes out both the unrealized capital gain and — critically — every dollar of accumulated depreciation recapture that would have been taxable on a sale.
Consider an investor who bought a rental building in 2010 for $500,000, took $200,000 of straight-line depreciation over the years, and watched the property appreciate to $900,000. A sale today would produce a $600,000 taxable gain ($900,000 minus $300,000 adjusted basis), including $200,000 of unrecaptured § 1250 gain taxed at up to 25% and $400,000 of regular long-term capital gain taxed at 0–20% — plus the 3.8% NIIT for investors above the MAGI threshold. The all-in federal tax on the sale could easily exceed $130,000.
If the investor instead holds the property until death and the entire estate falls below $15 million, heirs inherit at the $900,000 fair market value under IRC § 1014. The $600,000 of gain and the $200,000 of depreciation recapture simply disappear — no federal income tax and no federal estate tax on the transfer. With the OBBBA permanently raising the exemption and indexing it for inflation, this “swap till you drop” calculus now applies to a far broader range of real estate portfolios than it did when a 2026 sunset threatened to cut the exemption in half. Source: CBIZ, “2026 Real Estate Tax Opportunities for Investors and Property Owners”.
What to do
Model the “sell now vs. hold until death” decision with current numbers. For properties where accumulated depreciation and unrealized appreciation are substantial, holding to death may permanently eliminate a tax bill that a sale today would trigger. The depreciation recapture calculator can quantify what a current taxable sale would cost; compare that figure against your estate planning picture.
Revisit existing 1031 exchange chains. Investors who have rolled deferred gain across several properties should run the math: if the cumulative deferred gain and recapture are unlikely to push the estate above $15 million, holding the final replacement property to death may achieve a better after-tax outcome than continuing to exchange. The 1031 exchange calculator can compare exchange versus outright sale. Keep in mind that a 1031 exchange still makes sense for portfolios above the exemption or investors who need liquidity before death.
Update estate documents to reflect the new exemption. Many plans drafted under the TCJA era used funding formulas keyed to the prior exemption amount. Those formulas can produce unintended results — over-funding a bypass trust, for example — and should be reviewed by an estate attorney familiar with the OBBBA changes.
Do not ignore state estate taxes. About a dozen states still impose an estate tax at thresholds far below $15 million — some as low as $1 million. For investors with significant real property in those states, the federal exemption increase does not eliminate the state-level exposure, and multi-state planning remains essential.
Trend context — not a specific November IRS announcement and not tax advice. The estate and gift tax rules summarized here reflect the OBBBA (P.L. 119-21) as described by CBIZ and Schaaf CPA; confirm current law and your individual situation with a qualified estate attorney and tax professional before acting.
A worked example: when the estate exceeds the exemption
Consider a couple whose combined estate — including several rental buildings, a personal residence, and investment accounts — is worth $22 million in 2026. With both spouses’ $15 million exemptions available, $30 million of that estate passes free of federal estate tax, so no federal estate tax is due at all. Now suppose the estate is $40 million. The first $30 million is sheltered by the two exemptions (assuming portability is preserved), and the remaining $10 million is taxed at the 40% top rate — roughly $4 million of federal estate tax. For an investor in that position, lifetime strategies that move appreciating real estate and its future growth out of the taxable estate — gifts to irrevocable trusts or family limited partnerships, for example — can still produce large savings, even though they may trade away the basis step-up on the gifted property. The right answer depends on whether the estate tax saved exceeds the income tax cost of losing the step-up, which is why the two calculations must be run together rather than in isolation.
Portability: how married couples preserve both exemptions
A married couple does not automatically receive a combined $30 million exemption at the second death. The first spouse to die uses their own exemption against assets passing to anyone other than the surviving spouse — transfers to a U.S.-citizen spouse are already fully deductible under the unlimited marital deduction of IRC § 2056. Any exemption the first spouse does not use — the deceased spousal unused exclusion, or DSUE — can be carried over to the survivor, but only if the estate makes a portability election on a timely filed Form 706 (United States Estate Tax Return), generally due nine months after death with a six-month extension available, even when no estate tax is owed.
Families who skip Form 706 because the first estate was small sometimes forfeit millions of dollars of exemption that would otherwise have sheltered appreciated real estate at the second death. One planning note: the generation-skipping transfer (GST) tax exemption, also set at $15 million under the OBBBA, is not portable and must be allocated separately on the estate’s return.
The exemption is unified with lifetime gifts
The $15 million figure is not an estate-tax-only number. It is a unified lifetime exemption that covers both gifts made during life and transfers at death (IRC §§ 2010 and 2505). Every taxable gift an investor makes during life — for example, deeding a rental property to a child — uses up part of the same $15 million that would otherwise shelter the estate. Gifts above the annual gift tax exclusion (indexed each year; $19,000 per recipient for 2025) must be reported on Form 709 and reduce the remaining unified exemption dollar for dollar.
This is where real estate planning gets subtle. Gifting appreciated property during life removes future appreciation from the estate, but it carries the donor’s low basis to the recipient — a carryover basis under IRC § 1015 — forfeiting the step-up. Holding the same property until death keeps it in the estate but delivers the full basis reset under § 1014. For an investor comfortably under the exemption, holding is usually the better income-tax answer; for one well above it, gifting growth assets early can save estate tax that dwarfs the lost step-up.
Watch the limits of the basis step-up
The step-up is powerful but not universal, and investors sometimes assume it reaches assets it does not. Three limits matter most. First, income in respect of a decedent (IRD) does not receive a step-up under IRC § 1014(c): the gain built into an installment sale note, accrued but unpaid rent, and traditional retirement accounts remain taxable to the heirs just as they would have been to the decedent. An investor who sells a rental on the installment method and dies holding the note does not escape the deferred gain.
Second, property an investor has already moved into a completed irrevocable trust during life is generally outside the estate and therefore receives no step-up — a deliberate trade of estate-tax savings for the loss of the basis reset. Third, in the nine community property states, IRC § 1014(b)(6) allows a full double step-up on the entire property when one spouse dies, not merely the decedent’s half — a meaningful advantage over common-law states, where only the decedent’s interest steps up. You can estimate what a lifetime sale would cost in recapture with the depreciation recapture calculator before deciding whether to hold.
A closer look at state-level exposure
The federal exemption gets the headlines, but state-level transfer taxes are where many real estate investors actually get caught, because real property is immovable and is taxed where it sits. Roughly a dozen states plus the District of Columbia impose their own estate tax, and several have exemption thresholds far below the federal $15 million — Oregon’s is about $1 million and Massachusetts’s is $2 million, for example. These state exemptions are generally not portable between spouses, and most do not index for inflation the way the federal amount now does.
A separate handful of states levy an inheritance tax, paid by the beneficiary rather than the estate, often at rates that depend on how closely the heir is related to the decedent. Because a state can tax real property located within its borders even when the owner lived elsewhere, an investor who owns buildings in several states can face estate or inheritance tax in a state where they never resided. Coordinating ownership structure — for instance, holding out-of-state real estate through an entity — is a common way to manage that exposure and should be reviewed with counsel in each relevant state.
Common planning mistakes
Assuming the 2026 numbers are temporary. The prior exemption was scheduled to be cut roughly in half after 2025, which drove a wave of “use it or lose it” gifting. The OBBBA removed that cliff and made $15 million the permanent, inflation-indexed floor, so decisions no longer need to be rushed to beat a sunset.
Forgetting to file Form 706 for portability. The survivor’s access to the first spouse’s unused exemption depends on an election that is easy to miss when no tax is due. Treating depreciation recapture as unavoidable. Investors often sell heavily depreciated property and pay the 25% unrecaptured § 1250 tax when holding to death would have erased it. Overlooking the income-tax cost of lifetime gifts. Gifting low-basis real estate to save estate tax can hand heirs a large built-in gain; for estates under the exemption, that trade usually makes the family worse off. Ignoring liquidity. Where estate tax applies, it is generally due in cash within nine months, and an estate concentrated in illiquid real estate may be forced into a rushed sale unless planning — life insurance or the IRC § 6166 installment election for closely held business interests — supplies the cash.
Frequently asked questions
Does the stepped-up basis at death eliminate accumulated depreciation recapture?
Yes. Under IRC Section 1014, heirs inherit property at its fair market value on the date of death. That stepped-up basis becomes their new cost basis, so neither the unrealized capital gain nor the depreciation recapture accumulated during the decedent's lifetime is ever subject to federal income tax. This is why long-term real estate investors sometimes describe their strategy as 'swap till you drop' -- using 1031 exchanges to defer gain during life and counting on the basis step-up to eliminate it permanently at death.
How does the $15 million exemption affect my 1031 exchange strategy?
For investors whose total estate is comfortably below $15 million, a stepped-up basis at death could eliminate all deferred gain and recapture without any estate tax. In that scenario, a 1031 exchange still defers income tax during your lifetime but adds transaction costs and reinvestment restrictions that may not be necessary if you plan to hold the property until death anyway. For portfolios likely to exceed the exemption, 1031 exchanges remain valuable because they defer income-taxable gain that might also be subject to estate tax above the exemption threshold.
What is portability and do I have to file for it?
Portability lets a surviving spouse use the deceased spouse's unused exemption (the DSUE amount). It is not automatic: the first spouse's estate must elect portability on a timely filed Form 706, generally due nine months after death with a six-month extension available, even if the estate is too small to owe any tax. Skipping that filing can permanently waste the first spouse's exemption, which may matter a great deal if appreciated real estate pushes the survivor's estate toward the threshold later.
Does gifting a rental property to my children now save taxes?
It depends on the size of your estate. The $15 million exemption is unified across lifetime gifts and transfers at death, so a gift uses the same exemption your estate would otherwise use. Gifting also carries your original (low) basis to your children under IRC Section 1015, so they lose the step-up and inherit your built-in gain and depreciation recapture. For an estate comfortably under the exemption, holding until death usually produces a better after-tax result because of the basis step-up. For an estate well above the exemption, gifting appreciating property early can remove future growth from the estate and save estate tax that outweighs the lost step-up. Report gifts above the annual exclusion on Form 709.
Do assets I placed in an irrevocable trust get a stepped-up basis?
Generally no. Property you have completely transferred out of your estate into an irrevocable trust during life is usually not included in your taxable estate, and assets outside the estate do not receive a basis step-up at death. That is the intended trade-off: you remove the asset and its future appreciation from estate tax, but the trust and its beneficiaries keep your carryover basis. Some trust designs intentionally cause estate inclusion precisely to capture the step-up; which approach is better depends on whether estate tax or income tax is the larger concern, and it should be designed with an estate attorney.
After I inherit a rental, can I depreciate it again?
Yes. Because the heir takes a new basis equal to the property's fair market value at the date of death, the building portion of that stepped-up basis is depreciated fresh -- over 27.5 years for residential rental property or 39 years for commercial -- starting when the heir places it in service. The decedent's prior depreciation does not carry over and is not recaptured, which is one of the most valuable features of inheriting appreciated, heavily depreciated real estate. Land is still not depreciable, so the inherited value must be allocated between land and improvements.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.