Capitalizing on Market Dynamics – Estate Planning with Real Estate Assets

As we enter the final stretch of 2024, several financial, legislative, economic, and political undercurrents are aligning to create opportunities for families with real estate wealth and their estate advisors. These opportunities are maintained even as we expect sunsets on certain tax cuts and face political uncertainties.  

The Tax Cuts and Jobs Act’s Lifetime Gift and Estate Exemption  

The Tax Cuts and Jobs Act (TCJA) significantly increased the lifetime gift and estate exemption, which now stands at $13.61 million per person or $27.22 million per married couple. In other words, a married couple can give away $27.22 million before this is subject to any gift tax liability. These high exemption levels have meant fewer estates have been subject to federal estate taxes, and fewer taxpayers have paid federal gift taxes.  

Impending Changes of the Lifetime Gift and Estate Exemption  

However, more estate and individuals will likely be subject to estate and gift taxes as these tax breaks are set to revert or “sunset” back to pre-TCJA levels at the end of 2025. Before TCJA, individual lifetime exemptions were approximately $5 million. Therefore, it is prudent to prepare for the tax cut sunset and take advantage of the very high gift and estate tax exemption before it is significantly reduced.  Additionally, at the end of 2025, the current 40% maximum gift and estate tax rate of 40% will increase to 45%. Now is the time to give away assets tax-free before these opportunities change at the end of 2025. 

The Impact of Real Estate Market Dynamics  

Combined with this opportunity to take advantage of the high gift and estate tax exemption amounts, a set of unique occurrences in the U.S. real estate markets further enhance the need for wealthy real estate owners and investors to act soon. When the Federal Reserve began increasing interest rates, the commercial real estate market moved into a contraction mode, with decreasing values for most property types.  

As the Federal Reserve starts to lower interest rates, the decline in values has begun to slow. Moreover, with lessening supply for all property types, values are likely to eventually increase, so the time to gift is now. 

Multifamily Sector  

The multifamily sector has experienced a significant increase in inventory due to project completions, which have increased vacancy rates and put valuations under pressure. Approximately 500,000 new units have come online between 2023 and 2024. However, deliveries are set to plummet in the coming years—to approximately 360,000 units in 2025 and just 240,000 units in 2026 before falling further, indicating an inflection point for the better in the near future.  

Office Sector  

The office sector has been challenged since the start of the pandemic, with falling utilization rates due to working-from-home trends and office users opting for less space upon lease renewals. It is important to recognize that the most troubled office properties are mostly contained in a small subset of urban metro areas. According to JLL, 10% of office buildings in the U.S. comprise more than 60% of vacant office space, and 30% of buildings comprise more than 90%. Vacancies have increased with increased cap rates and lower values overall.  

Hotel and Retail Sectors  

Overall, hotel values decreased with increasing cap rates, although occupancies improved. However, the hotel market is highly fragmented.  

Retail has also shown signs of moderation, and demand for space has declined. Nevertheless, retail has been undersupplied for some time, and vacancy has decreased to 9.4% since the first quarter of 2024. Cap rates have increased; however, values have decreased. 

Industrial Sector  

For industrial, deliveries peaked during the third and fourth quarters of 2023 but moderated each quarter in 2024 and should halve in 2025 to about just 165 million square feet in net deliveries—a trend that should support rent growth again next year. Demand has always remained strong, so despite the increase in vacancy and cap rates, values have increased.  

Leveraging Valuation Discounts 

By using valuation discounts, these gifts of real estate can be effectively valued even lower, thus using up less of your lifetime exemption, passing on even more future asset appreciation to the next generation, and eliminating the family’s current estate tax burden. Accordingly, it’s important to plan now, get ahead of the curve, and get into the queue sooner rather than later.  

While real estate valuations are still low but expected to increase with gradually dropping interest rates, and while the gift and estate exemption levels are high and soon to be reverting to pre-TCJA level, now is the perfect opportunity to:  

• Gift real estate at low values. 
• Pay no gift taxes on the gift.  
• Permanently remove these assets from your estate.  

The anticipated value increase and appreciation of these real estate assets will then be passed on tax-free gifts to the next generation of family members.