Estate Planning With Real Estate

I keep seeing estate plans treated as a tax calculation when the family question is just as important: who receives the asset, who has to manage it, and who is free to sell. Real estate can defer tax for a lifetime and pass to heirs with the embedded gain wiped clean. It can also leave those heirs tied to one illiquid building and one another.

The first-order view is simple: use a 1031 exchange to defer tax, then rely on a step-up in basis at death. The second-order view is that the asset held at death—a building, a DST interest, or REIT-related units—sets the practical terms of the inheritance. This guide considers the 1031 exchange, DSTs, the 721 UPREIT, and Opportunity Zones through that lens.

The essentials for 2026

• The step-up in basis remains intact. Heirs generally inherit real estate at fair-market value, which can erase deferred capital gain and depreciation recapture.
• The federal estate and gift tax exemption is $15 million per person ($30 million per couple) in 2026. It is permanent and indexed, so most estates owe no federal estate tax; the income-tax step-up applies regardless.
• Deferrals do not all behave alike at death. A 1031 property, DST, or 721 operating-partnership interest can receive the full step-up. An Opportunity Zone’s original deferred gain does not: it passes as taxable income in respect of a decedent.

01 · Why Real Estate Is Built for Estate Planning

Real estate has two code-based features that make it unusually useful in an estate plan. Section 1031 can defer gain by moving investment real estate into replacement real estate again and again, without a mandatory endpoint. The step-up in basis can then reset the inherited asset’s basis at death.

Together, the sequence is straightforward: defer tax while the owner is alive, keep equity invested rather than paying tax at each sale, and potentially reset the basis for the next generation. Few major asset classes combine lifetime, pre-tax compounding with a potential reset of the embedded income-tax cost at death.

02 · The Step-Up in Basis: The Linchpin

At death, an inherited asset’s basis is generally stepped up to fair-market value. Consider a property bought for $800,000, depreciated over time, and worth $3 million at death. If the heirs’ basis becomes $3 million and they sell near that value, they would generally have little or no gain measured from the new basis. The deferred capital gain and depreciation recapture carried during the owner’s life can disappear for income-tax purposes.

In community-property states, a married couple’s property can receive a double step-up on the first death. That rule, like all basis matters here, must be applied to the owner’s actual title and facts.

What the step-up calculator is illustrating

The source calculator starts with a $3,000,000 property or portfolio value at death, $800,000 adjusted basis after depreciation, and a 28% blended tax rate. It permits illustrative values from $250,000 to $20,000,000, basis from $0 to $10,000,000, and a blended rate from 15% to 37%.

Its logic is:

1. Deferred gain at death = value minus adjusted basis.
2. Estimated tax without a step-up = deferred gain × blended rate.
3. Estimated tax erased by the step-up = that same estimated income-tax amount.

With the default figures, the deferred gain is $2,200,000 and a 28% blended estimate is $616,000. The point is not that this is anyone’s tax bill. It is that heirs who receive a $3,000,000 stepped-up basis may avoid tax on the $2,200,000 of deferred gain and recapture the prior owner carried; a lifetime sale instead makes the estimated $616,000 due at that blended rate.

This is illustrative only. The simplified rate bundles capital gains, depreciation recapture, and NIIT; actual mixes can include 25% recapture, 0–20% capital-gains rates, and 3.8% NIIT. Estate tax, if an estate exceeds its exemption, is separate. This is not tax advice.

03 · “Swap Till You Drop”: 1031 to the Finish Line

A 1031 exchange is the mechanism that carries deferred gain into the next property. Each properly structured exchange rolls the gain forward rather than recognizing it. If the owner continues exchanging and does not take cash, the deferred tax follows the investment. If the final position is held until death, a step-up may erase all of the gain deferred along the way.

That is the origin of “swap till you drop.” The exchanges defer; the death-time basis rule can forgive the income-tax burden. The discipline is real, though: cashing out late in life can break the chain and recognize the accumulated deferred tax at once.

The 1031 exchange defers the tax. Death forgives it. Everything in between is just choosing what your heirs find easiest to receive.

— Baker 1031 Research

04 · The 2026 Estate Tax Picture

Income tax on gain and estate tax are different taxes. The step-up addresses the former—the basis from which an heir’s gain is measured. Estate tax is a separate tax on the value transferred at death.

For 2026, the federal estate and gift tax exemption is $15 million for one person and $30 million for a married couple, made permanent and indexed for inflation under the 2025 law. In practice, most estates owe no federal estate tax and still receive the income-tax step-up.

For an estate nearing the exemption, lifetime gifts and trusts may matter. But gifting appreciated real estate has a trade-off: the recipient receives the donor’s old, carryover basis rather than a stepped-up basis. For highly appreciated property, holding until death is often more favorable for income taxes even when gifting may reduce the estate-tax base by moving future appreciation outside the estate.

05 · The Heirs’ Problem: You Can’t Split a Building

One building is indivisible. When several heirs receive it together, decisions about refinancing, repair, sale, and rent require agreement among people who may have different needs. The usual pressure points are conflict, a forced sale on someone else’s schedule, or one heir buying out the others.

Fractional interests can change the mechanics. DST beneficial interests, OP units, and REIT shares can give each heir a separate interest to retain or sell without a shared veto.

One building versus divisible interests

The source visualizer begins with $3,000,000 of real-estate value and 3 heirs. It divides the value into $1,000,000 for each heir. Its ranges are $500,000 to $20,000,000 of value and 2 to 6 heirs.

The source’s message is that divisibility matters more as the number of heirs grows. Even two heirs can face real friction. A DST, OP units, or REIT shares do not settle every family issue, but they make it possible for each heir to take a separate path.

06 · DSTs for Estate Planning

A Delaware Statutory Trust can address the division problem before it reaches the heirs. Ownership is through fractional beneficial interests, so an estate plan can leave stated percentages to stated heirs. Each heir can receive a share with a stepped-up basis rather than co-owning one building.

The structure is passive: an heir does not have to become a landlord. At a DST’s full-cycle sale, each heir can generally choose separately among cash, another DST through a 1031 exchange, or a REIT path. One person can cash out while another continues deferral. That flexibility, and its risks and timing, are discussed in the DST guide.

07 · 721 UPREITs for Estate Planning

A 721 exchange converts real estate into operating-partnership units of a REIT. Those units are easy to divide, can receive a step-up at death, and can offer a route to liquidity: heirs may convert units to REIT shares and sell them over time on their own schedules.

For a family that wants easy-to-split, sellable assets rather than a building to operate or a trust to monitor, a 721 can be useful. The trade-off is substantial. It is a one-way move: after the conversion to OP units, neither the owner nor heirs can use a 1031 exchange again. Converting units to shares during life is taxable, although the step-up can still reset the basis at death. The 721 guide covers the structure in more detail.

08 · Opportunity Zones & Estate Planning

Opportunity Zones can be useful for growth, but their death-time treatment differs. Death does not accelerate the Opportunity Zone tax. An heir steps into the owner’s position. The original deferred gain, however, does not get a step-up; it is income in respect of a decedent (IRD), and the heir still recognizes it on the program’s schedule.

Post-investment appreciation is different. Heirs can continue toward the ten-year exclusion that removes tax on qualifying growth. The estate-planning rule of thumb is therefore narrow: a 1031 property, DST, or 721 interest can give an heir a full step-up that erases deferred gain; an Opportunity Zone can favor appreciation while leaving the original deferred gain in place. Use an OZ for growth, not for a step-up. See the Opportunity Zones guide.

09 · Matching Strategy to Your Estate Goal

The right vehicle depends on the desired outcome. The source’s four-question exercise asks:

1. What is the top estate goal? Pass real estate with gain wiped clean; make division easy without fighting; or leave liquid, easy-to-sell assets?
2. How involved should heirs be? Keep managing real estate; remain completely passive; or probably cash out?
3. Should heirs retain a 1031 option? Yes; no, because simplicity matters more; or it does not matter?
4. How many heirs are there, and how aligned are they? One or two and aligned; several needing clean shares; or several who should go their own way?

The answers point toward three broad paths:

10 · Making It Easier on Heirs

Several planning moves can reduce stress and conflict even before a structure is chosen:

• Make the asset divisible before death. DST interests or OP units can leave clean, separable interests rather than a forced partnership in a building.
• Let heirs take different paths. Divisible interests can allow one person to cash out, another to defer, and another to hold for income without a veto.
• Use a revocable living trust to hold real estate so it can pass outside probate, more privately and usually faster than a will alone.
• Relieve heirs of management. A passive structure can spare an heir from becoming a landlord overnight or from arguing over who will take on the work.
• Talk with heirs now. Explain the plan and the reason for it before surprises become suspicions.
• Coordinate the team. The estate attorney, CPA, and financial advisor should work together because income tax, estate tax, and structure interact.

11 · Estate-Planning Readiness

The readiness check uses six statements. The first two are foundational:

1. I have a will and/or revocable living trust to avoid probate.
2. I understand which assets get a step-up at death and that lifetime gifts carry over my basis instead.
3. My real estate is in a form heirs can divide without forced co-ownership: DST interests, OP units, or shares rather than a single building.
4. I have used passive structures so no heir is forced to become a landlord.
5. I have talked with my heirs about the plan. It is the cheapest conflict-reducer there is.
6. I have coordinated the strategy with an estate attorney and CPA.

A score of 6/6 means the plan is in good shape, but it should be reviewed periodically and after major life or law changes. At 4/6 or 5/6, the remaining gaps should be closed with advisors. At 0–3/6, the message is to address gaps beginning with the foundational plan and basis rules.

12 · Frequently Asked Questions

Does a 1031 exchange eliminate the tax, or just defer it?

During life, it defers tax. The deferred gain can disappear at death if heirs receive a fair-market-value stepped-up basis, erasing the capital gain and depreciation recapture carried by the owner. That is the premise of “swap till you drop.”

Will my heirs pay tax when they inherit my property?

Generally, not on the built-in gain. A step-up can reset basis to fair-market value, so a sale soon after inheritance can produce little or no gain. They can owe tax on appreciation after inheritance. A separate estate tax applies only to estates above the $15M/$30M exemption.

How do DSTs or 721 units make inheritance easier?

They are divisible. Rather than forcing several heirs to co-own an indivisible building and agree on each decision, an estate can give each heir a fractional interest or units with a step-up. Each can keep or sell their own interest. DST heirs can also retain the ability to conduct a 1031 exchange.

Do Opportunity Zone investments get a step-up at death?

Not on the original deferred gain. That amount is IRD, so heirs still owe it. Post-investment appreciation can continue toward the ten-year exclusion. An OZ is the growth tool; a 1031 property, DST, or 721 is the step-up tool.

Should I gift property to my heirs now instead?

Usually not if the real estate is highly appreciated. A lifetime gift carries over the owner’s low basis, so heirs inherit the built-in gain. Holding until death can provide the step-up. Gifting may instead be considered when an estate exceeds the exemption and the owner wants future appreciation outside the estate.

13 · Glossary

• Step-Up in Basis: The reset of an asset’s basis to fair-market value at death, erasing deferred gain and recapture for heirs.
• Swap Till You Drop: Deferring gain through successive 1031 exchanges during life and passing the property at death for a step-up.
• Carryover Basis: The donor’s old basis that a recipient takes on a lifetime gift, with no step-up.
• Estate & Gift Tax Exemption: The amount transferable free of federal estate and gift tax—$15M per person in 2026.
• Income in Respect of a Decedent (IRD): Income earned but not recognized by a decedent. It receives no step-up and applies to Opportunity Zone deferred gain.
• Depreciation Recapture: Tax on depreciation deducted earlier; a step-up at death can erase it.
• Revocable Living Trust: A trust that holds assets so they pass outside probate, faster and more privately than a will alone.
• Double Step-Up: In community-property states, the step-up of both spouses’ halves on the first death.

14 · Sources & References

1. Cornell Legal Information Institute, 26 U.S. Code § 1014 — Basis of property acquired from a decedent (step-up in basis).
2. Cornell Legal Information Institute, 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment.
3. Cornell Legal Information Institute, 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution to a partnership.
4. Cornell Legal Information Institute, 26 U.S. Code § 2010 — Unified credit against estate tax.
5. Cornell Legal Information Institute, 26 U.S. Code § 1400Z-2 — Special rules for capital gains invested in opportunity zones.

15 · Disclosures

This material is for educational and informational purposes only and does not constitute investment, legal, tax, estate-planning, or financial advice, nor an offer or solicitation with respect to any security or property. Estate and tax planning is highly individual and governed by federal and state law that can change; the step-up in basis, exemption amounts, and the treatment of 1031, DST, 721, and Opportunity Zone interests at death depend on your specific circumstances.

DSTs, 721/UPREIT interests, and Opportunity Zone funds are illiquid, speculative, generally limited to accredited investors, and may lose value, including loss of principal. Calculator outputs are simplified estimates and ignore the interaction of capital-gains rates, depreciation recapture, NIIT, state tax, and any estate tax. Consult a qualified estate attorney, CPA, and financial advisor before acting.

About Baker 1031 Research

Baker 1031 Research is the Estate & Tax-Advantaged Real Estate Desk. It covers the full deferral toolkit—1031 exchanges, DSTs, 721 UPREITs, REITs, mineral interests, and Opportunity Zones—with an eye to how each strategy serves the next generation.

Right now, I would treat the possible step-up as one input, not an excuse to ignore liquidity, family alignment, title, and investment risk. Which of those constraints is doing the most work in your estate plan?