Real Estate Inheritance Tax in Florida: A Strategic Guide for Real Estate Investors and High-Net-Worth Buyers
Hidden Tax Traps in a “Tax-Free” State
Florida is often hailed as a haven for wealthy investors and estate planners due to its lack of a state inheritance or estate tax. But that reputation can be dangerously misleading. For real estate investors and high-net-worth individuals, inheriting property in Florida involves far more than just a smooth title transfer. From federal estate tax exposure to IRS audits, valuation disputes, liquidity challenges, and intergenerational transfer strategies—each decision has long-term financial consequences.
This guide reveals the tax landscape beneath the surface, optimized for those who own multi-million-dollar real estate portfolios, vacation homes, investment properties, or commercial holdings in the Sunshine State.
1. Florida’s “No Inheritance Tax” Status—What It Really Means
Florida does not impose a state-level inheritance tax or estate tax. This is a major advantage for investors relocating from high-tax states like California, New York, or New Jersey. However, this benefit only tells part of the story. Your estate may still trigger federal estate tax, and your heirs may face capital gains, property tax reassessments, or probate delays—especially if strategic planning is absent.
2. 2025 Estate Tax Exemption Rollback: Time-Sensitive Risk
Currently, the federal estate tax exemption sits at approximately $13.99 million per individual (2025 figures), double that for married couples using portability. However, this is scheduled to drop by half in 2026, back to pre-2017 levels of ~$6–7 million per person.
Real estate investors with high-value portfolios need to act before 2026 to mitigate this looming tax cliff. Gifting strategies, entity restructuring, and valuation discounts must be reviewed now—not later.
3. Estate Tax vs. Inheritance Tax vs. Capital Gains Tax
Let’s clarify the terminology:
Estate Tax: Paid by the estate before assets are distributed. Federally imposed.
Inheritance Tax: Paid by heirs on what they receive (none in Florida).
Capital Gains Tax: Paid when an heir sells inherited property for more than its stepped-up value.
Many high-net-worth families plan around estate tax—but overlook capital gains and depreciation recapture risks. Both can cost heirs dearly without proper tax planning.
4. Step-Up in Basis: A Critical Tool for Real Estate Heirs
One of the most powerful benefits of inheriting real estate is the step-up in basis. The IRS allows the cost basis of the property to reset to its fair market value at the date of death. This means:
No capital gains on appreciation during the decedent’s lifetime
Major savings if heirs decide to sell shortly after inheritance
However, for depreciated properties (such as rentals), recapture rules may still apply, and specialized planning is needed to prevent over-taxation.
5. Inheriting Investment Properties vs. Primary Residences
Not all properties are treated equally:
Primary Residences may qualify for homestead exemptions, property tax caps, and creditor protections under Florida law.
Investment Properties or vacation homes offer none of those benefits and may require different planning (e.g., trusts, LLCs, partnership structures).
The value of depreciation taken on rentals also factors into recapture taxes, potentially reducing the benefit of a stepped-up basis.
6. Depreciation Recapture: The Hidden Tax Waiting in the Wings
If the deceased took depreciation on the property while alive, the IRS may tax that portion of the gain at ordinary income tax rates, not capital gains rates. This can significantly increase the tax burden if the property is sold by heirs.
Proactive planning with your accounting firm can help offset recapture through strategies like cost segregation or installment sales.
7. Valuation Strategy: Audit Risk and IRS Challenges
The IRS frequently challenges the valuation of real estate reported in estate tax returns. This is particularly true for high-value or complex holdings like:
Waterfront property
Commercial real estate
Agricultural land
Short-term rental portfolios
We use third-party appraisers and forensic valuation models to build defensible tax positions, reducing the risk of penalties and estate audits.
8. Multi-State Property Holdings: More Than Just a Florida Issue
Real estate investors often hold property in multiple states. Here’s what matters:
The location of the property determines probate and property law
The residency of the heir may trigger inheritance taxes (e.g., Pennsylvania or Iowa)
Different states have different Medicaid recovery rules
We coordinate multi-state estate tax strategies that align property holdings with beneficiary locations and asset protections.
9. Liquidity Crunch: When Assets Are Rich and Heirs Are Cash Poor
Inherited real estate may be valuable—but illiquid. Heirs often lack cash for:
Property taxes
Insurance
Mortgage payments
Legal and probate costs
Federal estate tax obligations
Estate plans must include cash flow models, funding vehicles, or life insurance-backed liquidity plans to protect heirs from forced sales.
10. Using Trusts to Hold and Transfer Real Estate
High-net-worth investors use trusts to avoid probate, control distributions, and reduce estate exposure. Some strategic trust types include:
Irrevocable Trusts (freeze value and remove from estate)
Dynasty Trusts (preserve property across generations)
Family Limited Partnerships (enable valuation discounts)
Trusts must be paired with accurate accounting, regular appraisals, and IRS‑compliant reporting to be effective.
11. Probate and Title Transfers in Florida
Without planning, inherited real estate passes through Florida probate, which can delay transfers by 6–12 months or more. Avoid this by using:
Transfer-on-Death Deeds (TOD)
We advise clients on structuring clean title chains that minimize risk and time to transfer.
12. Medicaid Estate Recovery Program (MERP) Concerns
If the deceased used Medicaid for long-term care, Florida may pursue a claim against their estate, including real estate. Planning tools like Lady Bird Deeds or enhanced life estate deeds can legally protect the homestead from Medicaid recovery in many cases.
13. Installment Sales from the Estate: Smoother Than a Lump Sum
Rather than transferring property outright or forcing a sale, some investors use installment sales to heirs, which:
Defer capital gains tax
Provide income to the estate
Offer heirs time to build liquidity
Installment notes must follow strict IRS guidelines to avoid recharacterization.
14. Real Case Example: Coastal Portfolio at Risk
An investor owns a 5-property luxury rental portfolio valued at $19 million with $3.8M in depreciation taken. Upon death:
Federal estate tax = ~$2.1M (if no exemption planning)
Step-up resets basis, but recapture taxes apply if sold
No liquidity → heirs must sell or refinance fast
Planning with Square Accounting reduced this family’s tax burden by over $800,000 using QPRTs, valuation discounts, and a liquidity trust.
15. Key Takeaways for Real Estate Investors
Florida offers major tax advantages—but not blanket immunity
Timing is crucial, especially before the 2026 exemption rollback
Liquidity planning is as important as tax minimization
Every real estate asset deserves its own succession strategy
Your accounting firm must be part of the estate planning conversation
Why Square Accounting Is the Strategic Partner for Real Estate Legacy Planning
Deep expertise in multi-entity real estate accounting
Tailored estate tax mitigation for high-net-worth clients
Collaborative planning with your legal and financial team
IRS-audit ready valuation reports and documentation
Cross-jurisdictional planning for multi-state portfolios
Let Square Accounting help you protect what you've built—and ensure your heirs receive it intact.
Final Call: Schedule a Confidential Estate Tax Assessment Today
If you own investment real estate in Florida—or plan to—don't let default decisions erode your legacy. Schedule a private strategy session with Square Accounting today. We’ll analyze your holdings, model federal and capital gains exposure, and build a custom estate tax plan designed to protect your wealth across generations.
Frequently Asked Questions About Real Estate Inheritance Tax in Florida
1. Does Florida have an inheritance tax on real estate?
No. Florida does not impose an inheritance tax or estate tax at the state level. However, federal estate tax may apply if the estate exceeds federal exemption thresholds. Real estate investors with large portfolios must also consider capital gains, depreciation recapture, and probate costs.
2. Do I have to pay federal estate tax if I inherit property in Florida?
Yes, if the value of the decedent’s estate exceeds the federal estate tax exemption. As of 2025, the exemption is about $13.99 million per individual, but it is set to drop by half in 2026. High-net-worth investors are strongly advised to prepare for this rollback.
3. What happens to the cost basis when I inherit real estate in Florida?
Heirs benefit from a step-up in basis, which resets the property’s cost basis to its fair market value at the date of death. This significantly reduces capital gains taxes if the property is sold shortly after inheritance. However, depreciation recapture rules may still apply for rental or investment properties.
4. Will I pay capital gains tax if I sell inherited property in Florida?
Yes, but only on gains that occur after inheritance. Because of the step-up in basis, appreciation during the decedent’s lifetime is generally wiped out. If you hold the property and it appreciates further, those gains will be taxable when you sell.
5. Do heirs have to go through probate to inherit real estate in Florida?
In most cases, yes. Probate is required to legally transfer property ownership unless the property is held in a trust, joint tenancy with right of survivorship, or has a beneficiary deed. Investors should use estate planning tools to avoid costly and time-consuming probate.
6. How does depreciation recapture affect inherited rental property?
Depreciation taken by the decedent during their lifetime may be subject to recapture when the property is sold. This can be taxed at higher ordinary income tax rates rather than capital gains rates, reducing the tax advantage of the step-up in basis.
7. If I live outside Florida, do I still owe inheritance tax on Florida real estate?
Florida itself will not tax you, but your state of residence might. For example, if you live in a state that imposes inheritance tax, you could still owe taxes on property you inherit in Florida. Multi-state estate planning is critical for investors with cross-border holdings.
8. Can Medicaid place a lien on inherited property in Florida?
Yes, under the Medicaid Estate Recovery Program (MERP), the state may seek reimbursement for long-term care expenses by making a claim against the estate. However, Florida’s homestead exemption may protect certain primary residences from recovery if inherited by a spouse or dependent.
9. How can I avoid probate for Florida real estate?
Investors can avoid probate through strategies like:
Setting up a revocable living trust
Using transfer-on-death deeds (where available)
Structuring ownership as joint tenancy with right of survivorship
Utilizing Lady Bird deeds for primary residences
These tools simplify transfer, reduce costs, and keep ownership private.
10. What is the best way for real estate investors to plan for inheritance taxes in Florida?
The best approach depends on your portfolio size and goals, but common strategies include:
Establishing trusts (dynasty, irrevocable, QPRTs)
Using family limited partnerships for valuation discounts
Coordinating gifting and liquidity planning before 2026 exemption changes
Working with a tax and accounting firm like Square Accounting to forecast estate, capital gains, and liquidity needs
