The 5 Assets That'll Save Your Heirs (and the 5 That'll Destroy Them)

David Wiener: I want you to sit with one number. $177,500. That's the tax bill one of my clients would have paid if he'd sold his fourplex instead of holding it and passing it to his daughter. Capital gains tax plus the taxes on all the depreciation he'd taken. He didn't pay a dollar of it. He just kept the property, passed it on at his death, and his daughter inherited it with what we call a step-up in basis. That's just tax speak for resetting the property's cost for tax purposes to whatever it's worth when you die. She then contacted me to do a cost segregation study at that new $900,000 value so we could break the property into pieces that depreciate faster, like appliances and parking lots instead of treating everything over one long schedule. Two generations, two full rounds of depreciation, zero capital gains tax on the transfer. That's not a loophole. That's how the tax code is built to work for real estate investors who know how to use it. So that's the $177,500 problem in real life. We're going to zoom out from that one fourplex and talk about a bigger picture. Because that same dynamic is sitting inside a lot of real estate portfolios right now, and most investors have never seen it. So stay with me. Welcome to the Tax Strategy Playbook. I'm your host, David Wiener. Some of you know me as Mr. Cashflow, founder and CEO of Cashflow Strategies. A lot of real estate investors are making estate planning moves that will quietly cost their families six figures. Not because they're reckless and not because they don't care, but because they're getting advice designed for somebody with a primary home and 401k, not somebody with a portfolio of rentals and commercial property. So today I'm going to walk you through the five best things you can leave your heirs and the five worst traps you can leave them in when it comes to real estate. By the end, you'll know which bucket your estate falls into and what to tackle first. If you've never had a real conversation about how your real estate and your estate plan work together, stay with me because by the time we finish, you'll know the right questions to ask and the biggest gaps to close. So I'm to ask you to subscribe to the Tax Strategy Playbook so you don't miss episodes like this. And if you want to talk about cost segregation, 179D lookback studies, or RD credits for your portfolio, hit the link in the show notes and set up a call with me. Before we start ranking the best and worst estate planning moves, we need to talk about the playing field you're on. The tax rules have changed in a big way recently, and if you're not aware of that, you could be planning off of an old map. So here's why 2026 is the year to fix this. On July 4th, 2025, almost exactly a year ago from the day I'm recording this, President Trump signed the one big beautiful bill act, the OBBBA, into law. Two big changes from that bill matter a lot for real estate investors. First, it brought back and made permanent 100% bonus depreciation for most qualifying property you buy after January 19th, 2025. In plain English, for many business assets you can write off the whole cost in one year instead of slowly over several years. Second, it set the federal estate tax exemption at $15 million per person, $30 million for a married couple, starting in 2026, indexed to grow with inflation. That means most small and mid sized real estate investors won't pay federal estate tax, but your heirs can still get hammered by income tax. Capital gains and depreciation recapture if you have a sloppy plan. So, yes, the law is friendlier, but the investors who win are the ones who actually put a plan in place, not the ones who assume that good news means they can ignore it. Okay, with the rules of the game on the table, let's talk about the actual moves that create generational wealth instead of accidental tax bills. We'll start with the good news. The five best things you can leave your heirs as a real estate investor. Number one is the most powerful and the most overlooked. The single best thing most investors can leave their heirs is appreciated real estate they hold until death. Here's the key basis. Step up in basis. Your basis is just your tax cost in the property, what you paid minus depreciation you've taken over the years, minus any land value. At death, the tax rules usually reset your heirs basis to the property's fair market value on that date. That's the idea of a step up. So back to our example. You bought a fourplex in 2004 for $300,000. You've depreciated it for 20 years, taking about $218,000 off of write-offs. Back to our example. You bought a fourplex in 2004 for $300,000. You've depreciated it for 20 years, taking about $218,000 of write-offs. So your tax basis is now around $82,000. Today, that fourplex is worth $900,000. If you sell right now, your gain is $900,000 minus $82,000, about $818,000. You'll owe Capital Gains Tax plus a special tax called depreciation recapture. Which basically claws back part of that depreciation write-off you took at a higher rate. That adds up fast. If you hold the property until you die and your daughter inherits it, her step up basis is $900,000. If she sells it at $900,000, there's no gain, there's no recapture. That $177,500 tax bill just disappears. So the one investor who wins on taxes is the one buying the right properties. The investor who wins the generational wealth game is the one holding them through the right moments, like death. So that's the power of simply holding appreciated real estate until the right moment. So let's take that same idea and wrap some structure around it because how you own the property can be just as important as which property you own. That brings brings us to best asset number two. Best asset number two is the same property, but properly wrapped inside an LLC and a revocable living trust. So, some quick definitions. An LLC or limited liability company is a legal entity that owns the property and helps shield your personal assets from lawsuits related to that property. A revocable living trust is a legal document that says who gets your assets when you die and can keep things out of the court system called probate. If you hold real estate in your personal name with no trust, it usually goes through probate, a public court process that can take a year more, costs a few percent of the estate in legal fees, and often ends up with judges pushing to sell assets quickly just to settle any disputes. If your trust owns your LLC interests, everything you transfer privately according to your instructions, usually in weeks instead of months. If your trust owns your LLC interests, everything can transfer privately according to your instructions, usually in weeks instead of months. The LLC gives you protection while you're alive and a clean operating structure your heirs can step into when you're gone. That's what I call a succession ready portfolio. Your kids inherit not just a building, but a functioning business structure all around it. By we've now talked about what you can We've now talked about what you own and how you own it. But before we go further down the list, I want to pause and drill deeper into the engine that makes all of this work the step up in basis. If you understand this one mechanic, the rest of your estate plan starts to make a whole lot more sense. So let's connect step up and basis to cost segregation because this is where the real estate planning gets fun. A cost segregation study is an engineering based tax analysis of a property. That breaks it into different components, like carpet, cabinets, lighting, parking lots, each with its own depreciation timeline. Instead of depreciating the whole building over 27 and a half years for residential or 39 years for commercial, we carve out pieces that can be depreciated over a five and fifteen year window and on qualifying new purchases taken at a hundred percent bonus under OBBBA. Back to your daughter inheriting the forplex at a $900,000 stepped up value. She has a brand new basis. If she orders a cost segregation study, we can accelerate a big chunk of that $900,000 into faster write-offs. Now, this is important, so pay attention to this. Bonus depreciation, the ability to write off 100% in year one, does not apply to property whose basis comes from inheritance. She still gets the faster depreciation from cost seg. And when she buys her next property with her own money after January 19th, 2025, she gets the full 100% bonus opportunity, OBBBA, restored. So you use depreciation to slash your tax bill during your lifetime. Your heirs get a free depreciation runway plus bonus on new acquisitions. Same code, two generations. If you own commercial or multifamily real estate with an original cost of $150,000 or more, ⁓ This is exactly where cost segregation shines. My team and I do cost segregation 179D look back studies and RD studies every day. And we can tell you how quickly. And we can tell you quickly which properties qualify and what your accelerated depreciation window looks like under the new law. So click the link in the show notes to schedule a short assessment and start looking at your real estate plan through a tax lens. Once you see how step up works in real dollars, you start to realize cost segregation isn't just a one-year tax play, it's a multi-generation tool. So let's connect the dots and talk about what happens when you combine cost segregation with a hold until death strategy. That's best asset number three. Best asset number three is cost segregated property that you don't sell. You hold it and pass it on. When you do cost segregation, you're front-loading depreciation. That means if you sell, more of your gain is hit with a higher depreciation recapture rate. If you hold until death, That recapture is wiped out by the step up. Your heirs start fresh at current value, and they can do their own cost segregation study on that new basis. One property, two owners across generations, two full rounds of depreciation, with the recapture liability erased in the middle by the estate rules. That's long term tax planning, not just year to year tax prep. So we've been talking about buildings and entities. Now I want to tie in something most real estate investors keep in a separate mental bucket: retirement accounts. Your depreciation doesn't just reduce your tax bill, it can actually subsidize turning taxable retirement money into tax-free money for your heirs. That's best asset number four. Best asset number four is a Roth IRA you deliberately built using the tax savings from your real estate. Couple of quick definitions. A traditional IRA is a retirement account where you get a deduction now, but your withdrawals are taxed later as ordinary income. A Roth IRA is funded with after-tax money, but withdrawals are tax-free if you follow the rules. Under current law, most non-spouse heirs have to empty inherited IRAs within 10 years. If that's a traditional IRA, they're paying tax at their own rates for a decade. If it's a Roth, Those distributions are tax free. Here's where real estate comes in. Your depreciation, especially after cost seg, can push your effective tax rate way down. That's your Roth conversion window. You take money from your traditional IRA, convert it to a Roth, and pay the tax now at that artificially low rate instead of leaving your kids to pay at a much higher rate later. Your buildings are funding the tax cost of turning taxable retirement money into tax-free money for your heirs. We do this over and over with clients. Real estate isn't separate from your retirement plan. It's the engine that makes Roth conversions affordable. So we've covered how to pass properties, how to pass retirement dollars. The last best move solves a different problem liquidity. Real estate is great for wealth building and terrible for writing checks quickly. So let's talk about the one tool that can give your heirs cash exactly when they need it while protecting the portfolio. That's best asset number five. Best asset number five is life insurance held inside an irrevocable life insurance trust or an ILIT. An ILIT is a special trust that owns your life insurance policy, so the payout is not in your taxable estate and still goes to your chosen beneficiaries. Real estate is illiquid. You can't pay probate costs or taxes by selling half of a parking lot. An ILIT owned policy gives your heirs cash at exactly the moment they need it without adding to your estate tax and without income tax on the death benefit. Think of it as a bridge. The ILIT keeps your portfolio intact while your heirs use the cash to pay lawyers, taxes, or buy out siblings instead of fire selling properties. Okay. That's the upside. The five assets and strategies that put your heirs in the strongest position. Now we need to flip the script and look at the traps. Because some of the most common estate moves for real estate investors are quietly setting their families up for tax paying and legal fights. Let's walk through the five worst positions you can leave your heirs in. Worst position number one is a large traditional IRA your kids have to drain over 10 years. The Secure Act killed the old stretch IRA strategy for most non spouse beneficiaries. Today they generally have to empty that account by the end of the tenth year after you die. So if you leave them six hundred thousand dollars in a traditional IRA and they're already earning good money, adding thirty thousand dollars per year for 10 years can push them into higher brackets and burn a big chunk of that account in taxes. Meanwhile, many real estate investors could have been using their depreciation savings to convert that money to Roth at low rates. Instead, they've built the most tax heavy asset in their estate and ignored the best conversion window they'll ever have. That's the difference between someone who records what happened and someone who helps shape what happens next. You can see how a big traditional IRA left on autopilot turns into a 10-year tax treadmill for your kids. That's a paper asset problem. Let's move back to the real estate side and look at a structural problem I see all the time. Passing properties to ⁓ directly to multiple heirs with no LLC and no operating rules. So worst position number two is giving multiple heirs undivided interests in properties with no LLC and no operating rules. The undivided interest means each heir owns a slice of the whole property and Not specific units or a clearly defined share of cash flow. So you leave three kids a fourplex in thirds. One wants to sell, one wants to hold, one wants to refinance and pull cash out. Nobody can force the others, so they end up in court, and a judge orders the property sold, often at a discount just to end the fight. I've seen portfolios worth millions chew through eighty thousand dollars or more in legal fees this way. The fix is actually simple. Hold the property in an LLC with an operating agreement that says how decisions are made, how buyouts work, and who runs the show. Spend a few thousand now to avoid six figure headaches later. And rather than keep this abstract, I want to show you how these ideas play out in a real world portfolio. I'll change the names and some details, but the math and the mistakes are exactly what I see in client situations. So meet the Wilsons. The Wilsons are both 62. They own a duplex bought in 1998 for $180,000, now worth about $620,000. A 12 unit building bought in 2015 for $1.1 million, now worth around $2.4 million, with a cost segregation study already done. Three short term rentals worth about $900,000 combined, and a self directed IRA with $480,000. Not a bad ⁓ estate. Roughly 4.4 million. They have two adult kids, no entities, no trusts, everything in their personal names. Without planning, the duplex and the STRs, the short-term rentals, slog through probate, burning time and an estimated four percent in fees, around sixty-one thousand dollars. The IRA goes to the kids as a traditional IRA and they have to empty it in ten years, adding tens of thousands of taxable income a year. At their current taxable rates. And if the kids sell the 12 unit, they trigger the gain and recapture from the cost seg study and cut a big check to the IRS. Without With planning, their attorney moves the properties into an LLC with operating agreements and then into a revocable trust, so probate is bypassed and succession is clean. Their tax strategist designs a Roth conversion plan using depreciation from the 12 unit. To keep their effective rate low while converting part of the IRA to Roth. They add a $1.5 million ILIT for liquidity, and they document the short-term rental operations and line up a professional manager to keep income flowing. They might spend $15,000 to $25,000 on professionals, but they're preserving $350,000 to $500,000 in net wealth and avoid a mess in their family. That's a trade I will take every single time. The Wilsons are a good picture of how quickly an unplanned estate can bleed value. One of the biggest issues in their case, and in many others, is properties loaded with depreciation recapture and no clear exit strategy. So let's talk specifically about that problem and what to do instead. That's worst position number three. Worst position number three is owning properties with a lot of built-in recapture and no plan. Remember, Cost segregation accelerates depreciation and increases the portion of your gain taxed at the higher recapture rate when you sell. If your heirs inherit a 1031 replacement property, they inherit your deferred gain and recapture too. Those don't magically vanish unless a step-up basis resets the basis. So you either intentionally hold until death and let the step-up clear it, or You plan the exit with tools like installment sales, opportunity zone investments, or charitable trusts, each with specific rules you work through with your advisor. Doing nothing is not a plan. Recapture doesn't disappear just because you stop thinking about it. We've been focused on long-term rentals and larger assets. Now I want to zoom in on short-term rentals because they come with a very different kind of risk. It's not just about the building, it's about the business wrapped around it. If that business dies when you do, your heirs inherit a headache, not a cash machine. That's worst position number four. Worst position number four is short-term rentals with no documented operating plan for the person who comes after you. A short-term rental is a business wrapped around a property. Platform listings, reviews, cleaners, handymen, dynamic pricing, messaging, and sometimes a brand. If you die and nobody has the logins, the vendor list, or the playbook, The business stops, even though the mortgage, taxes, and insurance keep going. The fix for that: standard operating procedures for how bookings, turnovers, and issues are handled, a secure list of usernames, passwords, and vendor contacts, and a clear handoff to a trained family member or a professional manager. Without that, you're running a fragile business and you're locking that fragility into your estate. And finally, We get to the most common mistake of all. This one doesn't require a fancy strategy or a big portfolio. It just requires ignoring the estate planning conversation entirely. If your properties are all in your personal name and there's no plan, this is you. That's worst position number five. Worst position number five and the one I see most is everything in your personal name and no estate plan. Sophisticated investors. Great at cost seg in 1031s, optimizing depreciation every year, but all their deeds have only their name, no LLCs, no trusts, no written instructions. When they die, every property goes into probate. The court, not the family, drives the process. Creditors line up first. And if the heirs disagree, lawyers get paid before anyone else does. You worked hard to build the portfolio and dial in the tax strategy. Leaving it unstructured at the end is one of the easiest mistakes to fix and one of the most painful to live through for your family. At this point, you probably have a few questions bouncing around in your head. Things you've heard from an attorney or from a buddy at a meetup or from TikTok. It may or may not be true. Let me tackle a handful of the most common questions I get from clients and listeners so you can sanity check your own thinking. First one is. My attorney said I don't need an LLC because my properties are in a trust. Is that true? The trust answers who gets it when I die. An LLC answers who gets sued while I'm alive. In most real estate portfolios, you want both. The trust owns the LLC, the LLC owns the properties. Your attorney and your tax strategist should be talking to one another. Second question is I've heard step up and basis might go away. Should I plan around that? Every few years somebody floats the idea of limiting step up. It hasn't passed because it hits farmers, small business owners, and families. I plan around the law that we have. Step up and OBBBA included. And if Congress actually changes it, we adjust. Don't let fear of a hypothetical bill stop you from using all the benefits that exist right now. Third question is: can I do a 1031 exchange at death and to help my heirs? And the answer is. No, you don't need to. A 1031 is a lifetime tool to defer gains when you swap one property for another. At death, the step up handles the gain. If you're holding just to do a 1031 at death, you're aiming at the wrong target. Hold, pass, and let the step up work. Question four was what about gifting properties to my kids now? Gifting while you're alive usually gives them your basis, not a step up. If you gift them a duplex you bought for $180,000 that's now worth $620,000, their basis is $180,000. When they sell, they pay tax on a $440,000 gain. If they inherit it at your death, the basis jumps to $620,000 and that gain disappears. Gifting real estate can be the worst move in an otherwise solid plan if you don't think through the basis. Question five is I have a portfolio, but I don't have any plan. Where do I start? Start with an estate inventory. List every property, how it's titled, what you paid, what it's worth, whether you've done a cost segregation study on it or not, and who you want it to go to when you pass away. That one document will show you your biggest risks. Then sit down on purpose. With a tax strategist and an estate attorney and have them look at step-ups and entities and retirement accounts and liquidity together. So now that I've cleared up some of the most common misunderstandings, let's get really practical. Because I don't want this to be just an interesting episode. I want it to turn into action. So here's your playbook. Here are five concrete steps that you can take in the next 30 days to move your estate plan in the right direction. Step one. Build your estate inventory. Like we said, list every property, title, cost, current value, cost seg status, and intended heir. You can't fix what you don't see. Step number two: run your step-up numbers. For each property, calculate the adjusted basis, which is what you paid, minus the land, minus the total depreciation. List the current value. What you'd pay in tax if you sold now versus what your heirs would pay if they're in if they inherited and sell. You might need your tax strategist to help you come up with those figures. But seeing that side by side makes a hold versus sell a math question instead of a feeling. Number three, clean up your entity structure. Mark every property that's still in your personal name. Any property with multiple intended heirs and no LLC or trust jumps to the front of the line. Step number four, review your retirement accounts. Add up your traditional IRAs versus your Roth balances. If you've got big traditional balances on and your depreciation has your effective rate low, that's your Roth conversion window. Use it while it's open. And five, schedule a true planning session, not a tax prep meeting, a planning meeting. Bring your inventory, your retirement summary, and your STR operating info and talk through step-up basis. LLCs and trusts, cost segregation and bonus depreciation, Roth conversions, and life insurance and liquidity. And yes, if you want to help with the tax strategy side, the cost segregation, the 179D lookbacks, or the RD studies, I can help. So contact me or hit the link in the show notes. We've covered a lot of ground, concepts, examples, and a checklist you can start on this month. Let's pull it together so you have a clear mental picture of where you stand and what better looks like before we wrap up. Here's the recap. Best assets, appreciated real estate you hold until death, property inside LLCs and trusts, cost segregated buildings you pass with a step up, Roth IRAs funded by your depreciation savings, and life insurance inside an ILIT for liquidity. Your worst positions, big traditional IRAs with no Roth plan. Undivided interests with no LLC or agreement, properties loaded with recapture and no exit strategy, short-term rentals with no operating succession, and everything in your personal name with no estate plan. So if this episode helped you see your estate a little bit differently, here's your next step. If you need cost segregation, 179D on a commercial building or an RD study, that's what my team does day in and day out. Click the link in the show notes, set up a call with me, and I can give you more information. If you need a full-blown tax or estate planning, If you need full-blown tax and estate planning beyond that, I'm happy to introduce you to pros who understand real estate at this level. This isn't about working harder. It's working smarter with the taxes on the wealth you've already built. If you found this useful, subscribe to the Tax Strategy Playbook, leave a review, and share it with one investor you care about. That one share could easily save their family hundreds of thousands of dollars. Thanks for listening. I'm David Wiener, Mr. Cashflow. And I'll see you on next Tuesday on the next episode of the tax strategy playbook because tax evasion is a crime, but tax avoidance is mandatory.