For most Massachusetts families, leaving your rental property to your heirs at death beats gifting it during your lifetime, because your heirs receive a “stepped-up” cost basis that can erase decades of capital gains. If you gift the property now, your heirs take your original basis and inherit the built-in tax bill along with the building. The main reason to gift instead is to pull a fast-appreciating property, and all of its future growth, out of your Massachusetts taxable estate.
So the answer to whether you should gift your rental property now or leave it in your will is: it depends on whether capital gains tax or estate tax is your bigger problem.
Gift Now or Inherit Later
The whole decision turns on one concept: cost basis. Basis is the number the IRS uses to measure your taxable gain when a property is sold.
- If you gift the property during your life, your heir takes your basis. This is called carryover basis under Internal Revenue Code Section 1015. If you bought a rental for $150,000 and it is now worth $650,000, your heir’s basis is still $150,000. Sell it, and they owe capital gains tax on roughly $500,000.
- If your heir inherits the property at your death, the basis resets to the fair market value on the date you die. Under Internal Revenue Code Section 1014, that is the step-up in basis. Your heir’s basis becomes $650,000. If they sell it soon after for $650,000, the taxable gain is close to zero.
That difference, hundreds of thousands of dollars of gain that either survives or vanishes, is usually the most important number in this entire question.
What Is the Step-Up in Basis, and Why Does It Matter for Rentals?
The step-up in basis is a reset of an asset’s tax cost to its value on the date of death. For a rental property held for many years, it can be worth an enormous amount because rentals tend to appreciate and because you have likely been depreciating the building for years, which lowers your basis even further.
An example makes it concrete. Say you bought a two-family in Andover in 1998 for $200,000 and have claimed $110,000 of depreciation over the years. Your adjusted basis might be around $90,000, while the property is now worth $700,000.
- Gift it now: your child inherits the $90,000 basis and, on a sale, faces gain on roughly $610,000.
- Leave it at death: your child’s basis steps up to $700,000, and most of that gain disappears.
For families whose estates are below the taxable thresholds, the step-up is almost always the deciding factor, and holding the property until death is the better plan.
When Does Gifting the Property Now Make Sense?
Gifting during life is not wrong. It is right for a specific goal: shrinking a taxable estate, especially when the property is climbing in value.
Gifting now can make sense when:
- Your estate is over the Massachusetts $2 million threshold and you want to reduce it.
- The property is appreciating quickly. Gifting freezes today’s value in your estate and moves all future growth to the next generation, outside your estate.
- You want to shift rental income to a child in a lower tax bracket.
- You are concerned about long-term care costs and are planning around a future MassHealth application, which carries a five-year look-back and its own rules.
The trade-off is that you give up the step-up. You are choosing to accept a future capital gains cost in exchange for a present estate tax savings. Whether that math favors you depends on the size of your estate and how fast the property is growing.
How Does the Massachusetts Estate Tax Change the Decision?
Massachusetts makes this decision different from the federal one. The federal estate tax exemption is $15 million per person in 2026, so federal estate tax is a non-issue for the vast majority of families. Massachusetts taxes estates over just $2 million, and a rental property plus a home can reach that quickly.
Two features of Massachusetts law matter here:
- Massachusetts has no gift tax. You can give property away during life without a state gift tax, unlike the federal system where large gifts use up your lifetime exemption.
- Since 2023, Massachusetts only counts assets you own at death. Lifetime gifts are no longer added back into your estate for the state tax calculation. That means gifting a rental property genuinely removes its value from your Massachusetts taxable estate.
So for a family sitting just above $2 million, gifting a rental can drop the estate below the threshold and eliminate the state tax, at the cost of the step-up. For a family well under $2 million, there is little estate tax to save, and keeping the property for the step-up wins.
This is the kind of tradeoff we model as part of a full estate planning review.
What About Depreciation and Your Rental?
Rentals carry an extra wrinkle that personal residences do not: depreciation recapture. Over the years you own a rental, you deduct depreciation, which lowers your basis. When the property is sold, the IRS “recaptures” that depreciation and taxes it, often at a higher rate than ordinary capital gains.
Here is the planning point. Depreciation recapture disappears at death along with the rest of the gain, because the basis steps up.
If you gift the rental during life, your heir inherits both your low basis and the recapture exposure. For a heavily depreciated rental, that makes holding until death even more attractive from a pure tax standpoint.
Are There Middle-Ground Options?
You do not have to choose between an outright gift and doing nothing. Several structures blend the goals:
- Gift fractional LLC interests over time. Put the rental in an LLC and gift small membership interests each year within the annual exclusion. You keep control, shift value gradually, and can use valuation discounts.
- Use an irrevocable trust. Transferring the property to a properly drafted irrevocable trust can remove it from your estate while keeping rules on how and when it passes. Our trust planning team structures these to match each family’s tax and control goals.
- Combine estate and long-term care planning. If nursing home costs are a concern, the right trust can address both estate tax and MassHealth exposure, though timing and the five-year look-back are critical.
The best structure depends on your estate size, the property’s trajectory, and whether income tax or estate tax is the larger threat. This is a calculation, not a rule of thumb, and it is worth running the numbers before you act.
Frequently Asked Questions
Will my kids pay less tax if I gift the rental now or leave it in my will?
Usually they pay less if they inherit it, because the basis steps up to date-of-death value and erases the built-in gain. Gifting is better mainly when your goal is to reduce a taxable estate.
Does Massachusetts have a gift tax?
No. Massachusetts has no gift tax, and since 2023 lifetime gifts are not added back into your estate for the state estate tax. Gifting can therefore reduce your Massachusetts taxable estate.
What happens to depreciation if I gift the rental?
Your heir inherits your lowered basis and the depreciation recapture exposure. If the property is inherited at death instead, the basis steps up and the recapture generally disappears.
Is putting the rental in an LLC or trust a good compromise?
Often, yes. An LLC lets you gift fractional interests gradually while keeping control, and an irrevocable trust can remove the property from your estate with rules attached. The right choice depends on your numbers.
Run the Numbers Before You Decide
Gifting a rental to save estate tax while triggering a large capital gains bill can cost your family more than doing nothing. The reverse can also be true for a large, fast-growing estate. The only way to know is to compare the two outcomes for your actual property and estate.
To weigh gifting against inheritance for your rental property, contact us to schedule an estate planning consultation. We advise property owners across Essex County and the Merrimack Valley, including Andover, North Andover, Middleton, Reading, and Wilmington.