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Written by: Julie Baird | First American Exchange Company
Once property or cash is inherited, millennials and Gen Zers must decide whether to sell, reinvest, or reposition those assets in ways that align with their lifestyles, goals, and long-term plans. This is where advisors play a central role in helping clients move from uncertainty to strategy.
Helping Clients Weigh Selling Versus Repositioning
If you inherit a parent’s or grandparent’s personal residence that they have no desire to live in, selling may be the first thought that comes to mind. While selling with a stepped-up basis can be a great, low tax-impact move, advisors can help clients evaluate whether it is also the most strategic one.
Converting an inherited home into a rental property can create long-term cash flow, potential appreciation, and additional tax advantages, such as depreciation. In addition, once that property is treated as an investment, advisors can introduce a 1031 exchange as a longer-term planning tool.
A 1031 exchange, often called a like-kind exchange, allows an investor to sell a piece of real property and acquire another of equal or greater value while deferring capital gains taxes that would otherwise be due on the sale of the original property. For advisors, understanding how inherited property transitions into “held for investment” status is key to determining future eligibility.
Under normal circumstances, selling properties held for 12 months or less may trigger short-term capital gains tax, while longer-held properties are subject to long-term capital gains rates. With a 1031 exchange, gains can continue to compound on a tax-deferred basis.
So, if a client inherits an investment property, or converts an inherited home into one, a 1031 exchange can later be used to trade into assets that better align with evolving financial goals, risk tolerance, or lifestyle preferences. This flexibility is especially appealing for younger clients who may want real estate exposure without traditional landlord responsibilities.
Advising on State-Level Clawback Rules
State-level tax rules are an often-overlooked complexity, especially when heirs live in one state and inherit property in another. Some states have clawback provisions, allowing them to defer gains even after an exchange in a different state. Other states require withholding at the time of sale.
Here is an example advisors might encounter: A resident of Texas exchanges an inherited condominium located in California for like-kind property located in Texas. The exchange properly defers a $15,000 gain under IRC Section 1031. When the Texas property is later sold in a taxable transaction for a $20,000 gain, California retains the right to tax the previously deferred $15,000 because the gain is sourced to California.
Understanding and proactively planning for these nuances helps clients avoid unpleasant surprises and plan more strategically.
When Clients Inherit Cash Instead of Real Property
Not all inherited wealth will come in the form of physical real estate. This is where advisors can help younger clients deploy inherited cash into real estate as part of a broader portfolio strategy.
There are various investment vehicles they can consider, each with different risk profiles, return structures, and tax considerations. For example, inherited cash can be deployed into direct ownership of rental properties, or into passive real estate investments such as REITs and DSTs. Fractional or shared ownership models, as well as co-investment options, are also worth considering.
An advisor’s role is to help clients understand how each option fits into their broader financial plan, liquidity needs, and long-term objectives. The bottom line is that millennials and Gen Z are approaching a rare moment in which their generations will experience the largest real estate wealth transfer in history. For advisors, this moment represents a chance to deliver meaningful guidance when it matters most. Without an understanding of tax-efficient strategies, much of that wealth could be left on the table. The good news is that with the right guidance from trusted tax and legal advisors – and a thoughtful approach –this wealth can be preserved and provide financial security, passive income, and multigenerational prosperity.
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