Legal Question in Wills and Trusts in California

The gift tax would be on the current market value of the property less encumbrances, if any. Their tax basis if you give it to them during your lifetime is probably zero, since it is $16,000 LESS the depreciation deduction you have been taking all these years against your rental income. In short, a gift of the property to them in your lifetime is about the MOST tax DIS-advantaged move you could possibly make. The only good news is that it would not be reassessed for Prop 13 tax purposes.

Conversely, if you will it to them, or put it in a trust that goes to them when you die, there would be no estate tax unless there is a LOT more to your estate, AND their basis would be the fair market value on the date they inherit it.

If you REALLY want to benefit them, you should consider selling it and making a 1031 tax-free exchange into a property that maximizes your cash flow. Then pay them to manage it at a salary that just HAPPENS to be half of your net profit each, then put it in an intervivos trust that allows the property to pass to them when you die. The only taxes generated in that plan are the income tax they pay on the salaries, and capital gains if they ever sell it for more than the market value when you die. If they just keep 1031 exchanging it into better and better properties, there will never be any tax other than on the net income.