Passing Real Estate to Heirs: What to Know

Passing real estate to heirs has become an increasingly important part of succession planning as an estimated $124 trillion* in wealth is expected to transfer between generations in the United States through 2048. While that figure includes all forms of wealth, not just real estate, it demonstrates the scale of the succession planning decisions many families will face over the coming decades. For property owners, those decisions can be especially complex because investment real estate may represent decades of appreciation and a significant share of family wealth, yet, unlike cash or marketable securities, it cannot be easily divided among multiple beneficiaries.

This article explores the common challenges families face when passing real estate to heirs, compares several ownership transition strategies, and outlines considerations to help families choose the approach that best aligns with their long-term objectives.

*This article was produced by an independent third party. This article should not be considered a solicitation or recommendation. Any such recommendation or solicitation would be made under separate cover. We do not endorse or accept responsibility for the content of any third-party website.

Why Passing Real Estate to Heirs Can Be Challenging

Most ownership-transition strategies are designed to solve different challenges. Recognizing what they are makes it easier to evaluate which approach is the best fit for your family when planning for passing real estate to heirs.

Shared Ownership

When several heirs inherit the same asset, they also share responsibility for refinancing decisions, capital improvements, distributions, and future sales. Disagreements on any of these can delay decisions and reduce the asset's value for everyone.

Different Financial Objectives

Heirs rarely share identical investment goals. One may want to build equity through real estate, while another may prefer a passive investment. A third may want no part of property ownership at all. Identifying those priorities early helps families evaluate structures that align with each beneficiary's goals before a transfer occurs.

Dividing an Indivisible Asset

Cash and securities can be split to the dollar, but a single property cannot. When one property represents a significant share of the estate, giving every heir an equal portion often means forcing shared ownership on beneficiaries who may have different goals or financial needs. Families typically need to weigh alternatives, such as buyout provisions, life insurance to offset value, or other estate assets, to arrive at a distribution that reflects each heir's circumstances.

Decision-Making Authority

Professional property managers handle day-to-day operations, but owners remain responsible for major financial decisions. Families should determine, before ownership transfers, who holds authority to approve refinancing, capital expenditures, or a sale. A clear decision-making framework also helps resolve future disputes before they become costly.

Liquidity Needs

Real estate is relatively illiquid, and heirs may have very different cash needs. One beneficiary may need to access funds within months; another may be prepared to hold for a decade or more. Planning ahead allows families to evaluate structures, buyout rights, or staged distributions that accommodate those differences.

Ownership Strategies for Passing Real Estate to Heirs

The table below compares the primary ownership approaches families often evaluate when planning for succession.

*Each strategy's optimal fit can depend on tax situation, liquidity preferences, and investment timeline. Liquidity depends on the operating partnership agreement and should not be considered guaranteed.

No ownership strategy is universally better than another. The right approach depends on what the family is trying to accomplish. Some strategies preserve direct ownership, others reduce management responsibilities, and others provide greater flexibility when heirs have different financial priorities. The following sections explain how each approach works, its primary trade-offs, and the situations where it may be the best fit.

Continue Direct Ownership

Continuing direct ownership allows the property to remain in the family's name after it passes to the next generation. Rather than transitioning into another ownership structure, the heirs inherit the property and continue making major financial and investment decisions. For example, siblings who all want to remain invested may choose to keep an apartment community in the family while hiring a professional property manager to oversee day-to-day operations.

Pros

• Preserves direct ownership and family control over the property.
• Allows future generations to continue participating in rental income and potential appreciation.
• Gives the family flexibility to decide when to refinance, improve, or sell the property.

Drawbacks

• Major financial decisions remain the responsibility of the owners.
• Shared ownership can become more difficult as additional heirs or future generations become involved.
• A single property may not accommodate heirs with different financial goals or liquidity needs.

Best For

Families whose heirs want to remain invested in the property, share similar long-term objectives, and are comfortable making investment decisions together.

Sell the Property

Selling the property converts an illiquid real estate asset into cash that can be distributed among the heirs. Rather than requiring beneficiaries to remain co-owners, each person receives liquidity and the flexibility to pursue their own financial goals. This approach is often the simplest way to accommodate different priorities or avoid the long-term complexities of shared ownership.

Pros

• Provides liquidity that can be divided among heirs without requiring ongoing shared ownership.
• Simplifies estate administration by eliminating future management and ownership responsibilities.
• Gives each beneficiary the flexibility to make independent financial and investment decisions.

Drawbacks

• Ends the family's ownership of the property and any future participation in its income and appreciation.
• May not reflect the wishes of heirs who wanted to continue owning real estate.
• Depending on when and how the property is sold, taxes and transaction costs may reduce the amount ultimately distributed to heirs.

Best Suited For

Families that prioritize simplicity, liquidity, or giving each heir the flexibility to pursue different financial goals.

Delaware Statutory Trust (DST)

A DST allows eligible investors to exchange investment real estate for beneficial interests in professionally managed real estate. Instead of inheriting the responsibilities of owning and operating a property, heirs inherit passive interests in one or more professionally managed investment properties while a professional sponsor oversees leasing, financing, operations, and asset management. A DST can simplify succession for families that want to preserve real estate exposure without passing management responsibilities to the next generation, while allowing their equity to remain invested in real estate rather than potentially losing a portion to the IRS.

Pros

• An inherited DST interest may receive a basis adjustment if the applicable estate-inclusion and transfer requirements are satisfied, but the result depends on the ownership structure and other tax rules.
• Beneficial interests can be divided among multiple heirs by percentage, without requiring a sale or complex legal arrangements.
• Heirs inherit income-producing, professionally managed assets without becoming responsible for property operations.
• Because DST interests are fractional and illiquid, they may qualify for estate tax valuation discounts, potentially reducing the taxable value of the estate.

Drawbacks

• DST interests are typically illiquid; there is generally no active secondary market.
• Investors must qualify as accredited investors to participate.
• Investors have no control or voting rights over property-level decisions once invested.
• Requires coordination with legal, tax, and investment professionals.

Best Suited For

Families who want to preserve real estate exposure and passive income for heirs while eliminating management responsibilities and simplifying how the estate is divided among multiple beneficiaries.

721 UPREIT

A 721 UPREIT allows owners of qualifying properties to contribute accepted real estate to a REIT's operating partnership in exchange for operating partnership (OP) units. For families whose primary challenge is dividing a valuable property among multiple heirs, a 721 UPREIT replaces a single illiquid asset with ownership interests that are generally easier to allocate. Instead of forcing heirs into long-term co-ownership or an immediate sale, the family can remain invested in professionally managed real estate while creating a more flexible ownership structure for future generations.

Pros

• Replaces ownership of a single property with an interest in a diversified real estate portfolio.
• Eliminates the responsibilities associated with directly owning and managing an individual property.
• OP units can generally be divided among multiple heirs more easily than a single property.
• Allows families to remain invested in professionally managed real estate.
• OP units held until death may receive a step-up in basis under IRC Section 1014, potentially eliminating deferred capital gains for heirs.

Drawbacks

• Not every property qualifies for a 721 UPREIT transaction. The operating partnership determines which properties it will accept.
• Liquidity depends on the operating partnership agreement and may be subject to holding periods, approval requirements, redemption limits, or available funds.
• OP units are partnership interests rather than real property and generally cannot be used in a future Section 1031 exchange.
• A future redemption or exchange of OP units before death may trigger recognition of deferred gain.

Best For

Families that want to keep the majority of their equity invested in long-term real estate ownership while avoiding taxes and making an inheritance easier to divide among multiple heirs, particularly when they want to avoid forcing beneficiaries into shared ownership or an immediate sale, and when holding until death to eliminate deferred gains is part of the long-term plan.

Customized Ownership Transition

Some families have objectives that no single ownership structure can fully address. A customized ownership transition combines strategies to accommodate competing priorities, such as allowing one heir to keep the majority of their equity invested in real estate while avoiding taxes. At the same time, another receives liquidity, preserving a family portfolio while equalizing inheritances, or transitioning a large property without forcing every beneficiary into the same ownership arrangement. Rather than adapting the family's goals to fit a standard structure, the ownership strategy is designed around the family's specific assets, succession objectives, and long-term plans.

Pros

• Tailors the ownership structure to the family's specific objectives rather than relying on a one-size-fits-all solution.
• Can combine multiple strategies to balance fairness, liquidity, continued real estate ownership, and tax considerations.
• Provides flexibility when heirs have different financial goals, levels of involvement, or long-term plans.
• Can preserve real estate ownership while avoiding unnecessary shared ownership among beneficiaries.
• Particularly valuable for larger or more complex real estate holdings.

Drawbacks

• Requires coordination among legal, tax, and investment professionals.
• Planning and implementation are generally more complex than a single ownership strategy.
• The available options depend on the family's assets, objectives, and applicable legal and tax considerations.
• May involve additional planning time and transaction costs.

Best Suited For

Families with larger or more complex real estate holdings, multiple properties, or heirs with different objectives who need a flexible ownership strategy that cannot be achieved through a single structure.

Choosing the Right Strategy for Your Family

Before deciding how real estate should pass to the next generation, families should consider a few practical questions. The answers often narrow the ownership strategies worth evaluating.

What do you want the inheritance to accomplish?

Some families want future generations to continue owning the same property. Others are more focused on preserving their investment in real estate while reducing management responsibilities or improving diversification. Continuing direct ownership keeps the property in the family. A DST or 721 UPREIT can preserve long-term real estate exposure through professionally managed ownership. Each of these can keep equity invested while avoiding capital gains taxes. Under current U.S. tax law, inherited DST interests and OP units generally receive a step-up in basis, which may reduce or eliminate built-in capital gains for heirs. If preserving real estate ownership is not a priority, selling the property may provide the greatest flexibility.

Should future generations own the property or simply benefit from its value?

Owning an apartment community is very different from benefiting financially from the wealth it has created. Families that want heirs to continue making investment decisions may prefer direct ownership. Those seeking passive ownership may evaluate a DST or 721 UPREIT. If the objective is simply to distribute the property's value among beneficiaries, selling the property may be the most direct path.

How much responsibility should ownership involve?

Direct ownership gives heirs the greatest control but also requires ongoing decisions about financing, capital improvements, and long-term strategy. Families that want to retain control over those decisions may prefer direct ownership. Those seeking to reduce management responsibilities may find professionally managed structures such as a DST or 721 UPREIT more appropriate.

What does fairness look like for your family?

Treating heirs fairly does not always mean giving everyone the same asset. Some families may choose to divide ownership through direct ownership, while others may find that DST interests or OP units received through a 721 UPREIT are generally easier to allocate among multiple heirs. When heirs have different financial needs, levels of involvement, or long-term goals, selling the property or pursuing a customized ownership transition may provide greater flexibility.

Plan for the Next Generation with Bonaventure

Passing real estate to the next generation is about creating a structure that works for the people inheriting it and, in many cases, mitigating tax leakage wherever possible. Whether that means preserving direct ownership, transitioning to a professionally managed structure, or combining multiple approaches, planning gives families the opportunity to build an inheritance designed to succeed long after the transfer is complete.

Bonaventure supports investors throughout the real estate ownership lifecycle with multiple pathways, including direct multifamily investments, 1031 exchange opportunities, DST offerings, 721 UPREIT transactions, and customized ownership transitions for qualifying portfolios. Rather than fitting every family into a single structure, Bonaventure helps investors evaluate the approach that best aligns with their succession goals, tax considerations, liquidity needs, and long-term vision for preserving wealth across generations.

Explore Ownership Transition Strategies With Bonaventure Team

*This article is for educational and informational purposes only and is not intended to be all-inclusive and may be changed at any time without notice or obligation to update. This article does not constitute tax, legal, or financial advice. Bonaventure does not provide tax, legal, or accounting services. Tax laws and regulations are subject to change, and individual circumstances vary. Investors should consult their own tax advisor, attorney, or qualified intermediary regarding their specific situation before pursuing any of the strategies discussed. Use of the strategies herein is at your own discretion, and they should not be taken as a substitute for professional guidance in matters of law, finance, tax, or other critical areas.

DISCLOSURES

THE RISKS ASSOCIATED WITH INVESTING IN A REAL ESTATE PRIVATE EQUITY FUND GENERALLY INCLUDE:

Limited Regulatory Oversight - Since private equity funds are typically private investments, they do not face the same oversight and scrutiny from financial regulatory entities such as the Securities and Exchange Commission ("SEC") and are not subject to the same regulatory requirements as regulated investment companies, including requirements for such entities to provide certain periodic pricing and valuation information to investors. Private equity offering documents are not reviewed or approved by the SEC or any US state securities administrator or any other regulatory body. Also, managers may not be required by law or regulation to supply investors with their portfolio holdings, pricing, or valuation information.

Strategy Risk - Many private equity funds employ a single investment strategy. Thus, a private equity fund may be subject to strategy risk, associated with the failure or deterioration of an entire strategy.

Use of Leverage and Other Speculative Investment Practices - Since many private equity fund managers use leverage and speculative investment strategies such as options, investors should be aware of the potential risks. When used prudently and for the purpose of risk reduction, these instruments can add value to a portfolio. However, when leverage is used excessively and the market goes down, a portfolio can suffer tremendously. When options are used to speculate (i.e., buy calls, short puts), a portfolio's returns can suffer and the risk of the portfolio can increase.

Past Performance - Past performance is not necessarily indicative and is not a guarantee of a private equity fund's future results or performance. Some private equity funds may have little or no operating history or performance and may use hypothetical or pro forma performance that may not reflect actual trading done by the manager or advisor and should be reviewed carefully. Investors should not place undue reliance on hypothetical or pro forma performance.

Limited Liquidity - Investors in private equity funds have limited rights to transfer their investments. In addition, since private equity funds are not listed on any exchange, it is not expected that there will be a secondary market for them. A private equity fund's manager may deny a request to transfer if it determines that the transfer may result in adverse legal or tax consequences for the offering.

Tax Risks - Investors in certain jurisdictions and in private equity funds generally may be subject to pass -through tax treatment on their investment. This may result in an investor incurring tax liabilities during a year in which the investor does not receive a distribution of any cash from the Fund. In addition, an investor may not receive any or only limited tax information from private equity funds may not receive tax information from underlying investments in a sufficiently timely manner to enable an investor to file its return without requesting an extension of time to file.

Reliance on Fund Manager; Lack of Transparency - A private equity offering's manager or general partner has total investment authority over the private fund. There is often a lack of transparency as to a private equity offering's underlying investment. Because of this lack of transparency, an investor may be unable to monitor the specific investments made by the offering or to know whether the investments are consistent with the sponsor's historic investment philosophy or risk levels.

Due to the risks mentioned above, it is important to perform proper due diligence in evaluating and choosing private equity managers to place your money with. There have been occasions when private equity fund managers took on too much risk in their portfolio and lost a substantial amount of their investors' money.