Updated August 16, 2026
You can, but in California it is usually the worst of the available options, and the reason is that a gift moves the property without any of the benefits that make transfers at death attractive. A gifted interest carries your basis to the recipient — no step-up — so your children inherit the full capital gain and depreciation recapture exposure you have accumulated. Under Proposition 19, the transfer also triggers property tax reassessment, because the parent-child exclusion no longer covers anything other than a primary residence. So the gift costs the property tax benefit and gains nothing on income tax. If the goal is to get value to your children efficiently, gifting an apartment building interest shortly before a sale rarely accomplishes it.
Carryover basis. A recipient of a gift takes the donor's adjusted basis. On a building bought in 1980 and depreciated for decades, that basis is very low, and the entire gain travels with the gift. Property transferred at death, by contrast, generally receives a step-up to date-of-death value.
Property tax reassessment. Proposition 19 eliminated the parent-child exclusion for rental and investment property. A gift is a change in ownership, and it triggers reassessment of the transferred interest to current market value.
Gift tax reporting. Transfers above the annual exclusion require a gift tax return and use lifetime exemption. Tax may not be owed, but the reporting is required and the exemption is consumed.
Together those mean a pre-sale gift typically hands your children a larger tax liability and a larger property tax bill, in exchange for moving an asset they were likely to receive anyway.
Estate size. Removing value from the taxable estate. Legitimate for families near the federal exemption, though the estate tax question is a different one from the income tax question and should be analyzed by an estate attorney rather than assumed.
Getting children involved in the asset. Understandable, and usually better accomplished through an entity structure with the children as members, designed with the tax consequences in view, rather than through a deed transfer.
Spreading the gain across more taxpayers. Attractive in theory, and the mechanics rarely deliver — the recipients take carryover basis and the gain does not shrink, it just gets divided.
Avoiding probate. Achievable through a properly funded revocable trust without triggering reassessment or losing the step-up.
Most of what motivates a pre-sale gift is achievable another way at lower cost. That is the conversation worth having, and it is one for an estate attorney and a CPA together.
Assets expected to appreciate substantially in the future, where moving them out of the estate early captures growth outside it. That reasoning applies more comfortably to an asset early in its life than to a building about to be sold.
Charitable structures. Contributing an interest to a charitable remainder trust or a similar vehicle before a sale is a different transaction with its own rules, and for some sellers with very large gains it is genuinely powerful. It has to be structured well before the sale is under contract.
Families genuinely near the federal estate exemption, where the estate tax cost of holding exceeds the income tax cost of a carryover basis.
Even in those cases, timing relative to the sale matters enormously. A gift made after a sale is effectively negotiated can be treated as an assignment of income rather than a transfer of property, which defeats the purpose entirely. This has to be planned early.
Hold the building until death, let the step-up eliminate the accumulated income tax exposure, and accept that Proposition 19 will reassess the property tax. Or sell now, pay the tax, and gift cash — which is administratively simple and does not saddle anyone with a carryover basis in an illiquid asset.
Which is better turns on numbers specific to the family: the size of the gain, the current assessed value versus market value, whether the heirs would keep or sell the building, and whether the building's income can carry a reassessed tax bill. That comparison cannot be made without a real value for the building, which is usually the missing input.
Do not gift an interest in an apartment building shortly before selling it without running the numbers first. The gift forfeits the step-up in basis, triggers Proposition 19 reassessment on the transferred interest, and consumes lifetime exemption — while rarely reducing the total tax. Get a current valuation, then have an estate attorney and a CPA compare gifting, holding, and selling side by side. In most California families, gifting comes out third.
Does gifting avoid Proposition 19 reassessment?
No. Proposition 19 applies to transfers by gift, sale, or at death for anything other than a qualifying primary residence. A lifetime gift of a rental building triggers reassessment on the transferred interest just as a transfer at death would.
Can I gift a small percentage each year?
It is possible to transfer fractional interests over time using the annual exclusion, and some families do. Each transfer can trigger partial reassessment, and the recipients still take carryover basis. It is a strategy with real costs that should be modeled rather than assumed to be conservative.
What about putting the building in an LLC and gifting membership interests?
A common structure, and it can offer valuation and control advantages. It also has its own reassessment rules — transfers of entity interests can trigger reassessment at certain ownership thresholds — and it has to be designed by professionals. It is not a way around Proposition 19.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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