Real estate planning in 2025: Tax timing, gifting and liquidity

This year's planning conversations carry more weight than usual for property owners and investors. The One Big Beautiful Bill Act (OBBBA) has reshaped key pillars of real estate taxation, from capital gains treatment and depreciation schedules to interest deductibility and estate tax thresholds. These changes present meaningful opportunities for proactive investors, but the window to act on some of the most favorable provisions may be short.

Year-end is a natural inflection point: portfolio reviews, tax planning, and liquidity needs all converge, making it an ideal time to position real estate holdings for both near-term efficiency and long-term legacy goals.

Selling or exchanging property

1031 Exchanges

These remain a cornerstone for deferring capital gains, but the rules leave little margin for error. Investors still have 45 days from the sale to identify replacement properties and 180 days to close, deadlines that are absolute. A well-prepared exchange means having target properties and a qualified intermediary lined up before the sale closes, allowing you to move quickly.

Section 121 Exclusion

When a property has been converted from a primary residence to an investment, eligibility for the Section 121 exclusion (up to $250,000 for individuals and $500,000 for couples) depends on meeting the "two out of five years" rule for ownership and occupancy. Any period the property is held purely as a rental may reduce the exclusion. Confirm your status early with a tax advisor, especially if you plan to pair the sale with other year-end transactions.

Basis Management

Detailed records of improvement costs and closing adjustments can make a meaningful difference when calculating taxable gain, especially for high-value properties. A clean ledger and supporting documentation can translate into meaningful tax savings. Even if a sale isn't imminent, year-end is an ideal time to ensure your files are complete.

Qualified Opportunity Zones (QOZs)

For investors realizing capital gains, QOZs offer another deferral and exclusion strategy. Under OBBBA, rolling 10-year designations and enhanced basis increases for rural zones expand the scope and benefits of these investments. Gains from property sales can be reinvested into qualifying zones to defer tax and potentially exclude future appreciation.

Refinancing or leveraging

OBBBA makes the EBITDA-based limits on interest deductibility permanent, removing the prior 2028 sunset. This change enhances the appeal of refinancing or strategic leveraging with tools like lines of credit, HELOCs, or securities-based lending.

A year-end refinance can accomplish several goals:

• Secure long-term or necessary financing
• Free up cash for new investments
• Potentially create deductible interest expenses to offset other taxable income

This permanence allows for more predictable long-term planning around interest deductibility.

Depreciation opportunities for improvements

For qualifying projects placed in service after January 19, 2025, 100% bonus depreciation is available. This allows certain capital improvements to be written off in the first year rather than depreciated over time. Property acquired under a binding contract before January 20, 2025, is not eligible for 100% bonus depreciation, even if placed in service after that date.

The distinction between capital improvements (eligible for bonus depreciation) and repairs (generally deductible in the year incurred) matters. Coordinating with contractors and accountants now can help ensure work is categorized and timed to maximize deductions.

Gifting real estate: shifting growth out of the estate

Under the OBBBA, the federal estate and gift tax exemption remains historically high, creating room to transfer substantial real estate interests without triggering federal transfer tax.

In 2025:

• Individuals can gift up to $19,000 per recipient without using any of their lifetime exemption.
• Larger gifts can draw on the unified lifetime exemption ($13.99 million in 2025, increasing to $15 million in 2026, indexed for inflation thereafter), allowing substantial transfers without triggering federal gift or estate tax.

For real estate investors, the goal is often to move future appreciation out of the taxable estate while retaining control over management and cash flow. This can be achieved by gifting direct property interests or, more commonly, interests in an LLC or partnership that holds the property.

Control can be preserved through voting/non-voting recapitalizations and preferred/common structures that separate decision-making authority from economic benefit. These approaches allow the next generation to participate in growth while you maintain strategic oversight.

An important trade-off to note: Gifting today means forfeiting a step-up in basis at death, which can lead to higher capital gains tax if the recipient sells. For properties with significant built-in gain but limited growth prospects, retaining ownership for a step-up may be the better play. However, clients with significantly appreciated assets should model the full tax picture, including the commonly considered 20% capital gains exposure, the 25% depreciation recapture that applies to previously depreciated property, and the potential 40% estate tax on the asset's full value if held until death.

Depreciation recapture and estate tax exposures are often overlooked in favor of simpler gain calculations, but they can dramatically affect the net outcome of a sale, gift, or hold strategy. Certain estate planning structures, such as grantor trusts, lifetime exemption planning, or basis optimization strategies, can help preserve favorable tax treatment and improve flexibility across gifting, sale and legacy scenarios.

• Intentionally Defective Grantor Trusts (IDGTs) and Spousal Lifetime Access Trusts (SLATs) can enhance planning flexibility by shifting future appreciation outside the estate while maintaining access to income or liquidity. These structures also allow for the substitution of low-basis trust assets with higher-basis cash or securities, helping optimize basis and preserve exemption use.

In all cases, professional appraisals, accurate documentation, and well-drafted operating agreements are essential to secure any applicable discounts and withstand IRS scrutiny.

Additional year-end considerations

• Property tax deferral: In some states, deferring Q4 property taxes into January can align with other income deferral strategies.
• SALT deduction planning: State-level conformity to federal tax law can vary. Phaseouts based on MAGI can limit the benefit of SALT deductions for higher earners. For example, passive losses from real estate investments are added back to MAGI and may push investors into or beyond phaseout thresholds.
• Estate and liquidity alignment: Real estate should fit into the broader liquidity plan, ensuring assets can support business, philanthropic and family goals without forcing sales in unfavorable markets.

The bottom line

Year-end remains one of the most valuable checkpoints for real estate investors to fine-tune tax positioning, strengthen liquidity, and align property decisions with long-term goals. Whether you're considering a sale, exploring refinancing, accelerating improvements, or transferring assets to the next generation, thoughtful planning now can help preserve more of what you've built.

To make the most of these opportunities, connect with your Citizens Private Wealth advisor to review your holdings and develop a tailored strategy for the year ahead.