What Is the Best Way to Pass Property to Heirs?- Estate planning is done to ensure that wealth is passed efficiently, while minimizing tax exposure. For many families, wealth includes real estate. Gifting undivided real estate interests is often overlooked as a smart way to pass property to loved ones, as explained in a recent article, “Unlocking Value in Shared Real Estate” from Wealth Management.
Families owning joint properties like vacation homes, rental properties, or inherited land should consider the use of undivided real estate interests to secure a financial legacy. The undivided real estate interests refer to a fractional share of a property that multiple owners hold joint rights to, without any specific part belonging to any one person. Every owner has equal access and ownership to the entire property, and the owners don’t have to be related. These typically take the form of homes passed down to multiple heirs or rental properties owned by siblings or business partners.
The term “tenancy in common” is often used interchangeably with undivided real estate ownership.
There are some drawbacks to this ownership structure. Major decisions will need all owners to agree. Owners may not sell their joint rights to the property, unless they can find someone who wants to be a joint owner—there’s no significant market for buying a house with someone else’s family. This makes it challenging to achieve liquidity due to a lack of control and marketability.
What Is the Best Way to Pass Property to Heirs?
These same drawbacks produce significant benefits, namely, creating valuation discounts because of the inherent limitations on control and marketability. Unlike properties wholly owned by individuals, fractionally owned real estate is recognized by the IRS as having a fair market value that differs from that of properties wholly owned by individuals. A professional valuation expert will be needed to substantiate the discounts, allowing the family to claim accurate value reductions.
Here’s an example of how this might work. Let’s say three siblings inherit a family vacation home valued at $1.5 million. Each receives an undivided one-third interest. While the value of the total property is clear, the experienced appraiser takes into account the fractional ownership structure. The valuation discount is 30%, with the fair market value of the taxable gift being $350,000 per sibling. The total amount transferred for estate tax purposes is then reduced to under $1.1 million from the original $1.5 million.
Planning with an experienced estate planning attorney and a professional valuation expert is crucial for effectively applying valuation discounts. The IRS scrutinizes valuation discounts, so having real market data is necessary to support the discount. This is not the time to use a boilerplate form or use non-professionals.
Despite the complexity, the use of undivided real estate ownership can yield substantial tax advantages, making this something to discuss with your estate planning attorney to secure your legacy.
Schedule your phone consultation: THE LAW OFFICES OF CLAUDE S. SMITH, III
What Is the Best Way to Pass Property to Heirs?
Reference: Wealth Management (May 19, 2025) “Unlocking Value in Shared Real Estate”
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