Estate Taxes for Real Estate: 2025 Strategies the Wealthy Aren’t Sharing

This information is current as of 10/10/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

The biggest threat to your real estate legacy isn’t a market crash—it’s the silent bite of estate taxes. In 2025, high-net-worth families in California face a perfect storm: soaring property values, aggressive IRS enforcement, and changing federal exemptions that could vaporize millions in generational wealth. Yet, with the right moves, you can turn these rules to your advantage.

Quick Answer: What’s Different About Estate Taxes for Real Estate in 2025?

For 2025, the federal estate tax exemption remains high—$13.99 million per person, but will increase to $15 million in 2026 (see IRS guidance). The exemption is indexed to inflation, but California has no separate state-level estate tax. However, the value of real estate assets pushes many families past that federal bar, exposing them to tax rates up to 40%. Strategic planning, annual exclusion gifting, and advanced trust structures are essential to shield your property portfolio from unnecessary taxes.

How Estate Tax Works for California Real Estate

Estate tax is levied on the transfer of property at death. The decedent’s worldwide assets—not just California property—are totaled. If the estate exceeds the federal threshold, the excess is taxed up to 40%. For someone with $22M in real estate, $8M would be exposed to the tax, leading to an immediate, non-negotiable bill of up to $3.2 million.

The emphasis for high-net-worth individuals is to reduce the transfer tax burden through advanced planning: shifting assets, using valuation discounts, and leveraging charitable vehicles. Annual per-person exclusion gifts—set at $19,000 in 2025—are underused given the scale of most real estate portfolios.

KDA Case Study: High-Net-Worth Family Defends $32M Portfolio

The Nguyen family held a substantial portfolio of apartment buildings and commercial property in coastal California, collectively appraised at $32 million. Their concern: looming estate tax on transfer to their children, which would trigger a potential $7.6 million tax.

KDA implemented a multi-layered approach:

• Valuation discounts using family limited partnerships (FLPs) and LLCs
• Timed annual $19,000 exclusion gifts to each heir and their spouses/grandchildren
• Asset freeze partnerships to peg future appreciation outside the taxable estate
• Revocable trust replacement with a dynasty trust for multigenerational protections

The result: A 28% reduction in the estate’s taxable value—eliminating more than $2 million in estate taxes. KDA’s strategy cost $52,000 in legal/consulting fees, yielding an immediate 38x ROI in tax savings and preserving family legacy for generations.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Advanced Strategies: Real Estate Gifting, Trusts, and Entity Structures

For estates with $10 million+ in real property, 2025 is a rare window of opportunity. Here are the top tactics for serious savings:

• Annual Exclusion Gifting: Give up to $19,000 per recipient each year, per donor. Multiplied across heirs, this can shield hundreds of thousands in value over a decade. For example, a couple with four children and eight grandchildren could move $456,000 out of their estate in 2025 alone.
• Discounted Valuation with LLCs and FLPs: Transferring real estate interests into entities allows for minority and lack-of-marketability discounts. IRS generally accepts 20-35% combined discounts—meaning an $8M apartment building could be valued for tax purposes at $5.2-6.4M if held via a properly structured FLP or LLC (see IRS FLP guidance).
• Dynasty and Irrevocable Trusts: Dynasty trusts keep assets out of the grantor’s taxable estate for multiple generations, locking in the current exemption before laws change in 2026. Irrevocable trusts can remove future appreciation from estate taxation, critical for fast-growing or prime-location properties.
• Qualified Personal Residence Trusts (QPRT): Move a highly appreciated residence out of your estate at a discounted value, continuing to live in it for a defined term while bypassing future appreciation for estate tax.
• Charitable Lead and Remainder Trusts: Enable you to donate real estate interests, receive a charitable deduction, and still retain income or future family benefit depending on the trust structure.

These approaches combine to sharply reduce taxable estate size, justify substantially lower asset values to the IRS, and lock in today’s high exemption before Congressional change.

Why High-Net-Worth Owners Lose Millions: Common Estate Tax Mistakes

Many clients, even with eight-figure portfolios, make classic errors that cost their heirs millions:

• No or outdated trusts: Relying on wills or revocable trusts leaves assets fully taxable, especially if trust language hasn’t been refreshed for exemptions and portability rules updated since 2018. (See IRS Estate Tax FAQs.)
• Overlooking appraisals: Failing to establish defensible, IRS-compliant appraisals—especially for commercial or unique properties—invites audits and higher assessments.
• Improper gifting timing: Not utilizing annual exclusion, resulting in last-minute, large gifts subject to much higher scrutiny and less predictable IRS acceptance.
• Single-entity ownership: Holding major assets in own name instead of FLP/LLC structures forfeits valuation discounts and exposes assets to both estate taxes and creditor risk.
• No plan for liquidity: Estates with no cash to pay taxes must sell assets at fire-sale prices, often during market downturns.

Red Flag Alert: If your estate plan hasn’t been reviewed since before 2018, you may be relying on outdated exemption assumptions that expose far more of your wealth than you realize.

Pro Tip: Use Both Gifting and Discount Valuation Simultaneously

Combine annual exclusion gifting with entity-based discounts for exponential impact. For a $16M asset split among eight heirs and discounted via an FLP, $3.8M of value can be shifted out of the taxable estate in one year with virtually no gift tax exposure. This strategy is legal, IRS-compliant, and easily defendable with proper paperwork and intent (see IRS resource).

How Do I Defend My Appraisals Against the IRS?

A credible, independent appraisal is the best defense. The IRS expects detailed, reasoned reports from licensed appraisers, including market comps, income approaches, and justification for any discount factors. If using discounts for minority interest or lack of marketability, document transfer restrictions and legal limitations. Consider periodic appraisals, especially after major renovations or shifts in market value, so you’re not stuck with a single high-water-mark.

Will the Exemption Decrease or Change in 2026?

Yes. Barring future Congressional action, the unified exemption rises to $15 million per individual in 2026, with annual inflation indexing. It is a rare opportunity to “lock in” ultra-high exemptions before rules or the political climate shift. Using outright gifts, dynasty trusts, or asset freeze vehicles before expiration guarantees use of the higher limit—even if you outlive the law’s effective date.

Contextual Links and Further Reading

For more strategies on advanced real estate tax savings and compliance, read our California real estate tax strategies pillar article. If you’re ready for hands-on estate tax defense, view our real estate tax preparation services for high-net-worth families or explore our comprehensive offerings.

FAQs: Estate Taxes for California Real Estate Owners

Can I avoid estate tax entirely by gifting property now?

No, but you can dramatically reduce the ultimate liability through annual and lifetime gifting, valuation discounts, and trust use. Be mindful of gift tax filing requirements (see IRS Gift Tax guidance).

Is an LLC or FLP always needed for my real estate?

They’re rarely mandatory but essential for large portfolios or when seeking valuation discounts. Not every property needs its own entity—focus on high-value, income-producing, or specialty-use assets first.

How are debts or mortgages counted in estate valuation?

Liabilities against real property reduce included value, but only if properly documented and supported by up-to-date statements. Unsecured debts may require separate substantiation.

What’s the IRS review process for estate tax returns?

Expect a 12-18 month review window for estates with significant real property. Audits focus on appraisal quality, discount legitimacy, and trust structures. Plan for supporting documentation and open dialogue with professional advisors throughout the process (see IRS Estate Tax).

Three Fast Takeaways for High-Net-Worth Real Estate Owners

• Lock in the $13.99M exemption now; rules could change after 2025
• Discount real estate values within FLPs/LLCs for IRS-approved savings of 20-35%
• Mix gifting and trust strategies for aggressive, legal reductions in taxable estate

Book Your Estate Tax Strategy Session

Your real estate legacy should be measured in generations, not tax bills. If your portfolio is $8M or more, it’s time for an offensive plan—before the IRS makes the next move for you. Book your personal strategy session with KDA’s estate experts and secure your family’s future today. Click here to book your consultation now.