Step-Up in Basis and Estate Planning for 1031 Investors

What does a step-up in basis actually do?

Your basis is the number the IRS subtracts from your sale price to figure your gain. For real estate you bought, it starts as your purchase price plus closing costs and improvements, then goes down every year by the depreciation you deduct. After 25 years of depreciation, a building's adjusted basis can be a small fraction of what it is worth.

Section 1014 says that property acquired from a decedent takes a basis equal to its fair market value at the date of death (or at the alternate valuation date six months later, if the executor elects it under §2032 and the election lowers the estate tax). The heir does not inherit your old basis. They get a new one.

Here is the plain arithmetic. Say you bought a duplex in 1999 for $500,000 and have taken $250,000 of depreciation, so your adjusted basis is $250,000. It is worth $1.5 million today.

• If you sell it today for $1.5 million, your taxable gain is $1,250,000.
• If you die owning it and your daughter inherits it, her basis is $1.5 million. If she sells for $1.5 million a few months later, her gain is zero.

The word "step-up" assumes values went up. The rule works in both directions. If a property is worth less at death than its basis, the heir's basis steps down to the lower value and the loss disappears with it. I see this mostly with office buildings bought before 2020; an owner sitting on a paper loss gets no benefit from holding it until death.

Two more mechanics matter for real estate owners. First, the heir's holding period is automatically long-term under §1223(9), even if they sell the week after the estate distributes the property. Second, the heir can depreciate the building portion of the new, higher basis from scratch. Under current law a building that has been fully depreciated by the parent can produce a new stream of deductions for the child.

Why does this matter so much to 1031 investors?

A 1031 exchange does not erase gain. It moves your old basis into the replacement property, adjusted for any boot, added debt or new cash. Every time you exchange, the deferred gain rides along. After three or four exchanges over 30 years, the deferred gain is often the largest single liability on an investor's personal balance sheet, even though it never shows up on a statement.

That liability has a strange property under current law: if you still own the replacement property when you die, §1014 resets the basis and the deferred gain is never taxed. The IRS does not go back and collect on the earlier exchanges. Nothing in §1031 or §1014 requires it.

Let me run a full chain, because the size of the number is the whole point.

Say you bought a fourplex in Oakland in 1996 for $400,000. In 2009 you exchanged it into a 14-unit building in Sacramento, adding a larger loan. In 2022 you sold the Sacramento building and exchanged into interests in three Delaware Statutory Trusts, now worth $3.2 million in total. Across the chain you added $510,000 of basis through new debt and cash, so your total invested basis is $910,000. You have taken $600,000 of depreciation over the years. Your adjusted basis is $310,000.

If you sold everything today for $3.2 million (ignoring selling costs to keep the arithmetic clean), the federal tax would look roughly like this:

California taxes capital gains as ordinary income. At the top marginal rate of 13.3%, the state tax on $2,890,000 would be about $384,000. All in, close to $1.1 million, or about 34% of the sale price.

If instead you die owning the DST interests, your heirs' basis becomes $3.2 million (assuming that is the date-of-death value). If the DSTs sell the properties a year later for $3.2 million, the heirs have no gain to report. Under current law, the $1.1 million is not deferred any longer; it is gone.

The $1.1 million figure assumes top brackets, no selling costs and no change in value. It also assumes current law holds until your death, which is the assumption I would push hardest on (more on that below). And the heirs would still owe estate tax if your total estate is large enough.

What happens to depreciation recapture at death?

People are often surprised that recapture goes away too. The rules that tax recapture on a sale, §1245 and §1250, both have exceptions for transfers at death: §1245(b)(2) and §1250(d)(2). Because the heir's basis is reset to fair market value, there is no prior depreciation left in the heir's basis to recapture.

For most investment real estate, the tax that matters is not §1250 recapture in the narrow sense (that applies only to depreciation in excess of straight-line, which is rare for buildings placed in service after 1986). The tax that matters is "unrecaptured §1250 gain," the portion of your gain equal to the straight-line depreciation you took, taxed federally at a maximum of 25%. On a long exchange chain that is often hundreds of thousands of dollars. The step-up wipes it out for the heirs under current law, the same as the rest of the gain.

Cost segregation raises the stakes. If you or a DST sponsor reclassified part of a building into 5-, 7- or 15-year property and took bonus depreciation on it, that personal property is §1245 property. The death exception covers it too, so the heir still takes a fair market value basis. The exposure is during your life. If you sell before death, that accelerated depreciation comes back as ordinary income, not at the 25% rate. Investors who did aggressive cost segregation in their sixties are making a larger bet on holding until death than they may realize. For the mechanics of recapture on a sale, see Depreciation Recapture Explained.

Is "swap till you drop" a real strategy or a slogan?

"Swap till you drop" means exchanging from property to property for the rest of your life so the deferred gain is never recognized, then letting your heirs inherit with a stepped-up basis. It is a real strategy and, for the right person, I think it is the default. It is also a slogan that gets repeated without its costs.

Here is who I think it fits: someone who would hold real estate anyway, who does not need the cash from a sale to live on, whose estate is under the federal exemption (or who has a separate estate tax plan), and who has heirs who will be able to deal with whatever they inherit. For that person, paying a million dollars of tax to sell and reinvest in something similar makes little sense.

Here is what the slogan leaves out:

• You keep paying transaction costs. Every exchange has costs: commissions, title, escrow, loan fees, and if you buy DSTs, the load built into the offering. Over several exchanges those costs add up, and they come out of the same equity the step-up is supposed to benefit.
• You stay concentrated in real estate. A family that holds 80% of its net worth in exchange property for 30 years has made a large, undiversified bet. The tax deferral is a reason to accept some of that, not a reason to ignore it.
• You are betting on your own timeline. The plan works only if you hold until death. If you need the money at 78 for care, or a divorce forces a sale, the deferred gain comes due at whatever rates apply then.
• You are betting on current law. Section 1014 has been in the code in some form for over a century, but Congress has tried to limit it more than once (see the section on proposals below).
• Your heirs inherit an operating problem. If what you hold at death is a single management-intensive building, your children inherit a tenant base, a roof and possibly a disagreement about whether to keep it. That is one reason I see older investors move into DSTs. Whether DSTs fit is a separate question with its own risks, covered below.

The point I make most often: don't let the tax tail wag the dog. If the property is wrong for you, a smaller after-tax amount in the right investment can be better than a larger deferred amount in the wrong one. I would rather show someone the numbers both ways and let them decide than assume they should defer forever.

How does the community property double step-up work for California owners?

If you are married and live in a community property state, this is probably the single most valuable estate-planning detail in this guide.

Normally, when one co-owner dies, only the decedent's share gets a new basis. Section 1014(b)(6) makes an exception for community property: when one spouse dies, both halves of property that qualifies as community property under state law get a new basis, as long as at least half of the property was included in the decedent's gross estate. Planners call it the "double step-up."

California is a community property state, along with Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. A few other states (Alaska, Tennessee, South Dakota, Kentucky and Florida among them) let couples opt in through a community property trust. Whether those elective arrangements get §1014(b)(6) treatment has not been tested much, so I would treat them as less certain than the traditional states.

Here is the difference in dollars. Say a married couple in San Francisco owns DST interests worth $3 million. Their combined adjusted basis is $600,000. One spouse dies.

If that $1.2 million of gain were taxed at a combined top rate of about 37.1% (20% federal, 3.8% NIIT, 13.3% California), the survivor would owe roughly $445,000 that the community property title would have avoided. Part of the gain might be taxed at 25% federally as unrecaptured §1250 gain, so the real number would differ, but the order of magnitude is right.

Three things trip people up:

1. Joint tenancy is not community property. Many California couples hold title as "husband and wife as joint tenants" because a title officer or a form suggested it. Joint tenancy gives survivorship but, for federal tax purposes, generally gets only the half step-up described in the next section. California Civil Code §682.1 created a form called "community property with right of survivorship," which gives you survivorship and keeps the community property character.
2. DST subscription documents ask how you take title. When you invest in a DST, the subscription agreement has a vesting section. The joint tenancy box is often the first one, and people check it out of habit. If the money came from a community property sale, that box deserves a conversation with your estate attorney before you sign. If the exchange is being done by your living trust, the trust is the purchaser and the trust documents control the character.
3. Calling it community property doesn't make it so. Character depends on how the property was acquired, with what funds, and whether the spouses changed its character in writing. Property one spouse owned before marriage is separate property unless it was properly transmuted. If the question will matter (and with a large deferred gain, it will), sort it out with an estate attorney while both spouses are alive. Arguing about it after a death is harder and more expensive.

The double step-up has a cost worth naming. When the first spouse dies, the survivor now owns 100% of the property with a full new basis. Depreciation restarts on that basis, which is good. But if the property has fallen in value, both halves step down. That is rare for long-held California real estate, but it happens.

What about joint tenancy and other ways to hold title?

Outside of community property, the rules depend on who the co-owners are.

Spouses holding as joint tenants or tenants by the entirety. Section 2040(b) treats a "qualified joint interest" between spouses as half owned by each, regardless of who paid. Half is included in the first spouse's estate, so half gets a new basis. In the table above, that is the $1.8 million result.

Non-spouses holding as joint tenants. Under §2040(a), the full value is included in the estate of the first to die, except to the extent the survivor can show they contributed to the purchase. If a mother and son hold a rental as joint tenants and the mother paid for all of it, the whole property is included in her estate and the son generally gets a full step-up. If the son paid half, roughly half is included and half steps up. Keep records of who paid what; the burden is on the survivor.

Tenants in common. Each owner's share is included in his or her own estate, and only that share gets a new basis.

Single-member LLCs. A single-member LLC is usually disregarded for income tax, so the owner is treated as owning the property directly and the step-up applies to the real estate.

Multi-member LLCs and partnerships. This one catches people. When a partner dies, the heir gets a new basis in the partnership interest itself (the "outside basis"). The partnership's basis in its buildings (the "inside basis") does not change unless the partnership has a §754 election in effect, which triggers a §743(b) adjustment for the heir's share. Without that election, the heir can have a stepped-up interest and still be allocated gain when the partnership sells. If your family holds property in an LLC taxed as a partnership, ask your CPA whether a §754 election is in place or would be made.

DSTs. A DST is generally treated as a grantor trust for income tax, which is why its interests qualify for a 1031 exchange in the first place under Revenue Ruling 2004-86. Each investor is treated as owning an undivided fractional interest in the trust's real estate. In my understanding that means the step-up applies at the level of the investor's share of the property, without the partnership inside-basis problem. Confirm the treatment with your CPA for the specific trust.

What does the estate tax look like after the 2025 law?

The step-up and the estate tax are different rules. People confuse them all the time, so let me separate them.

• Step-up (§1014) is an income tax rule. It sets your heirs' basis. It applies whether or not your estate owes any estate tax.
• Estate tax (§2001 and following) taxes the transfer of your estate at death. It applies only above the exemption, and the top rate is 40%.

The One Big Beautiful Bill Act, signed July 4, 2025, set the basic exclusion amount at $15 million per person for people dying in 2026, indexed for inflation after that, with no scheduled expiration. The IRS confirmed the $15 million figure in Revenue Procedure 2025-32. A married couple can shelter up to $30 million if the surviving spouse elects "portability" of the unused exemption, which requires filing a federal estate tax return (Form 706) at the first death even if no tax is due. Revenue Procedure 2022-32 gives a simplified path to make a late portability election within five years of death, but I would not plan on needing it. The 2026 annual gift tax exclusion is $19,000 per recipient, and gifts to a spouse who is not a U.S. citizen are capped at $194,000 per year.

"No scheduled expiration" is not the same as permanent. The previous law had a sunset at the end of 2025. The new law removed it. A future Congress can change the number in either direction.

Here is how the two rules interact in a hypothetical. Say a widower dies in 2026 with a $9 million estate, including $6 million of exchange property with a $1 million adjusted basis.

• Estate tax: $9 million is under the $15 million exclusion, so no federal estate tax (assuming he had not used any exemption on lifetime gifts).
• Income tax: his children take a $6 million basis in the exchange property. The $5 million of deferred gain is never taxed under current law.

Now make it a $25 million estate, including the same $6 million of exchange property. The estate owes roughly 40% of the $10 million above the exclusion, about $4 million of estate tax. The children still get a $6 million basis. The step-up and the estate tax both apply to the same property. The estate tax is often the harder problem in large estates because it is due nine months after death, in cash, and real estate (especially an illiquid DST interest) does not turn into cash on that schedule. Executors in that position should ask about §6166, which in some cases allows estate tax attributable to a closely held business to be paid in installments, though passive real estate investments often do not qualify.

State estate taxes. California has no estate tax or inheritance tax. Some states do, with much lower exemptions than the federal one (Oregon's is $1 million and Massachusetts' is $2 million, for example). If you own property or live in one of those states, the state tax can apply to estates that owe nothing federally.

California property tax is a separate issue. Proposition 19, effective in 2021, narrowed the parent-to-child exclusion from reassessment. Inherited rental property held directly is generally reassessed to market value, which can multiply the annual property tax on a building held since the 1990s. That reassessment hits the heirs' cash flow, not their income tax basis. How Prop 19 applies to DST interests depends on where the property is and how the trust holds title, so ask your estate attorney how it applies to what you actually own.

How do DSTs change estate administration?

This is where I think DSTs earn a real look for older investors, alongside their real drawbacks.

Dividing among heirs. Say you have three children and die owning a single $3 million apartment building. Your children inherit it together, usually as tenants in common, through your trust or estate. Now they have to agree on a property manager, on capital repairs, on whether to refinance and on when to sell. If one child wants out and the others don't, the options are a buyout the others may not be able to afford or a partition action. I have seen siblings who got along fine before an inheritance stop speaking over a building.

Now say you die owning $3 million spread across five DST interests. Your trustee can usually re-register each interest, or slices of each interest, to each child. Each child ends up with about $1 million of DST interests in his or her own name. Nobody has to agree with anybody. When a DST eventually sells its property, each child decides alone whether to take the cash or do his or her own 1031 exchange.

What the paperwork looks like. The sponsor's transfer agent typically asks for a death certificate, letters testamentary or a certification of trust, transfer forms signed by the executor or successor trustee and sometimes a medallion-stamped signature. Read the trust agreement or ask the sponsor; transfer at death is routine, but each sponsor has its own forms and timing. An heir does not usually have to be accredited to inherit an interest. An heir who wants to buy a new DST with proceeds later would have to meet the accredited investor standard at that time (see Accredited Investor Requirements).

Valuing the interest at death. Your executor needs a date-of-death value to set the heirs' basis and, for larger estates, for Form 706. There is no public market price for a DST interest. Sponsors often provide periodic estimated values, and an executor may want an independent appraisal. Appraisers sometimes apply discounts for lack of marketability and control to fractional interests. A discount lowers estate tax for a taxable estate, but it also lowers the stepped-up basis. For an estate under the exemption, a discount can cost the heirs basis without saving any estate tax. That trade-off should be a deliberate decision, not a default.

If an estate is large enough to require a Form 706, §1014(f) and §6035 require the executor to report the values to the heirs on Form 8971, and the heirs' basis generally cannot exceed the value finally determined for estate tax.

Heirs and depreciation. Heirs can depreciate the building portion of their new basis. With a DST, the sponsor's annual tax reporting allocates income and expenses, but each investor (and now each heir) computes depreciation on his or her own basis. The heir's CPA will need the date-of-death value and an allocation between land and building. For more on how DST income is reported, see DST Tax Reporting.

721 exchanges. If you contributed exchange property or DST interests to a REIT's operating partnership in a 721 exchange, you hold operating partnership units. Those units also get a step-up at death under current law. Your heirs may then be able to redeem the units for REIT shares or cash with little or no gain, because their basis is the date-of-death value. Before death, a redemption is a taxable event for you, and units in a 721 can't go back into a 1031 exchange. The 721 exchange guide covers those trade-offs in detail.

The catch. DST interests are illiquid. Your heirs cannot sell them on demand; they generally wait until the sponsor sells the property, which can be years away and is not on anyone's schedule but the sponsor's. If your estate will owe estate tax, or your heirs will need cash, a portfolio that is all DSTs can create a liquidity problem at exactly the wrong time.

Where do trusts fit?

Trusts are tools, and different trusts do opposite things to the step-up.

Revocable living trusts. Assets in a revocable trust are included in your estate under §2038, so they get the step-up. In California, a revocable trust also avoids probate, which is slow and has fees set by statute. Under Probate Code §10810, the attorney's statutory fee is 4% of the first $100,000 of the estate, 3% of the next $100,000, 2% of the next $800,000 and 1% of the next $9 million, and the executor is entitled to the same amount. On a $3 million gross estate that is $43,000 each, or $86,000 together, and the fee is calculated on gross value, without subtracting mortgages. For most of the people I work with, holding exchange property and DST interests in a revocable trust is the ordinary choice. A 1031 exchange can be done inside a revocable trust because, for income tax purposes, you and the trust are the same taxpayer.

Irrevocable trusts. A completed gift to an irrevocable trust takes the assets out of your estate, which is the point when estate tax is the concern. But assets outside your estate generally do not get a step-up at your death. In Revenue Ruling 2023-2, the IRS confirmed that assets in an irrevocable grantor trust that are not included in the grantor's gross estate do not get a new basis under §1014, even though the grantor paid the trust's income tax during life.

That creates a real trade-off. Moving a $4 million DST interest with a $500,000 basis into an irrevocable trust might save 40% estate tax on future appreciation, but the trust (and eventually the beneficiaries) keeps the $500,000 basis. With a $15 million exemption per person, most families I talk with are not near the estate tax. For them, keeping low-basis exchange property in a revocable trust, where it gets a step-up, probably makes more sense than moving it out. Families well above the exemption have a harder calculation, and some estate attorneys build in a "swap power" (under §675(4)) that lets the grantor exchange high-basis assets into the trust for low-basis assets coming back into the estate before death. That is attorney territory, and I would not try it without one.

Charitable remainder trusts come up when someone wants to sell, diversify and get income without paying the gain up front. They are a different strategy with their own rules, and I mention them only so you know they exist.

What about gifting property to your kids now?

Lifetime gifts and inheritances get opposite basis treatment, and this is the mistake I most want people to avoid.

When you give appreciated property away during your life, the recipient takes your basis under §1015. This is called carryover basis. The deferred gain goes with the gift.

Say you give your daughter DST interests worth $1.5 million with an adjusted basis of $200,000.

• By gift: her basis is $200,000. If the DST sells for $1.5 million, she reports $1.3 million of gain. Depending on her bracket and state, that might be $300,000 to $500,000 of tax.
• By inheritance: her basis is $1.5 million (the date-of-death value). If the DST sells for $1.5 million, she reports no gain under current law.

The gift also uses your lifetime exemption. A gift above the $19,000 annual exclusion requires a gift tax return (Form 709) and reduces your remaining $15 million exclusion dollar for dollar. You probably would not owe gift tax, but you would have spent exemption and handed your daughter a tax bill that waiting would have avoided.

For property that has lost value, the rule is harsher: for computing a loss, the recipient's basis is the lower of your basis or the fair market value at the time of the gift. The loss you could have taken disappears.

When does gifting appreciated real estate make sense? Mostly for families whose estates are well above the exemption, where getting future appreciation out of the estate is worth losing the step-up, and that is a judgment for an estate attorney with real numbers. For everyone else, a better pattern is to give cash or high-basis assets during life and hold low-basis exchange property until death.

One more trap: gifting property right after an exchange. A 1031 replacement property has to be held for investment. If you exchange into a property and then promptly give it to your children, the IRS could argue you never held it for investment. Courts have gone both ways on transfers shortly after exchanges. If you are thinking about gifting replacement property, talk to your tax attorney before the exchange, not after.

What happens if you die in the middle of an exchange?

It happens, and it gets technical fast.

If you sold your relinquished property and die before buying the replacement, your estate or trust can generally complete the exchange within the original 45-day and 180-day deadlines, which do not stop at death. If the exchange is completed, the replacement property is then subject to the step-up like anything else you owned at death.

If the exchange fails, the gain from the sale has to be reported. Whether that gain falls on your final individual return or is treated as income in respect of a decedent depends on the facts and timing, and the answer changes the tax result. Call your qualified intermediary and your CPA right away; don't let a family member assume the deadlines are paused.

A related point: if you sold property on an installment note (seller financing), the unpaid note is income in respect of a decedent under §691. It does not get a step-up under §1014(c). Your heirs pay tax on the remaining gain as the payments come in. People who carried back a note to avoid a big tax bill are sometimes surprised that the note does not get the same treatment as the property would have.

Could Congress take the step-up away?

Yes. Here is the history, because it shapes how much I would rely on current law.

• 1976: Congress replaced the step-up with carryover basis for estates. The change was postponed and then repealed in 1980 before it took full effect.
• 2010: For estates of people who died in 2010, executors could elect no estate tax in exchange for a modified carryover basis system under former §1022. It lasted one year.
• 2021: The administration's American Families Plan proposed taxing unrealized gains at death above a $1 million exclusion per person, with additional relief for a residence. It also proposed capping 1031 deferral at $500,000 of gain per year. Neither became law.
• Other bills: Members of Congress have introduced other bills to tax gains at death, such as the 2021 STEP Act, which proposed a $1 million exclusion. None passed.

The Joint Committee on Taxation has estimated that excluding capital gains at death costs the government about $40 billion a year, which is why the idea keeps coming back. The 2025 law did not change §1014 or §1031.

My view: plan around current law, because that is the law, and because guessing at future law is how people end up making expensive moves for nothing. But don't build a plan that only works if current law lasts 25 more years. Keep the ability to sell, keep some liquidity outside of exchange property, and revisit the plan when the law changes. Proposals have often included transition rules or exemptions, but you should not count on any particular version.

How do the choices compare side by side?

Here is one hypothetical, run three ways. A 72-year-old widow in California owns DST interests worth $3.2 million with an adjusted basis of $310,000 and $600,000 of depreciation taken. Her estate is $7 million, under the federal exclusion. Assume values don't change and her heir is in the top brackets. These are illustrations, not projections.

The table makes holding look obvious, and for this widow it may be. But I would still ask her questions the table can't answer. Does she have enough income and liquid savings outside the DSTs to live on for 20 more years? Is she comfortable that the properties she holds will still be the right ones at 85? Would her son be better off with $2.1 million of cash today than with $3.2 million of illiquid interests later? The tax math is the starting point, not the decision.

What are the most common mistakes?

The ones I see most, roughly in order of how much they cost:

1. Gifting low-basis property during life when holding it until death would have given the heir a full step-up.
2. Married Californians holding exchange property as joint tenants instead of community property, losing half the step-up at the first death.
3. Moving low-basis assets into an irrevocable trust for estate tax reasons when the estate was never close to the exemption.
4. No §754 election in a family partnership or LLC, so heirs get a new outside basis but still get allocated gain inside the partnership.
5. No date-of-death valuation. Heirs who sell years later and can't document the value at death are in a weak position if the IRS asks.
6. Assuming the step-up covers seller-financing notes. It doesn't.
7. Treating "swap till you drop" as a reason to keep exchanging into whatever is available instead of what fits.
8. Forgetting that the step-up and the estate tax are separate, and assuming a large estate escapes estate tax because the income tax basis resets.

None of this is tax or legal advice for your situation. Before you change title, set up a trust, make a gift or plan an exchange around your estate, confirm the details with a CPA or tax attorney and, for the exchange itself, a qualified intermediary.

Risks and limitations

This guide discusses DSTs and 721 exchanges as one way some investors hold real estate late in life. Those are securities, and they carry real risks that can outweigh the estate-planning benefits for a given person:

• Illiquidity. DST interests and operating partnership units are not traded on an exchange. You and your heirs generally cannot sell when you choose, and there may be no buyer at any price before the property sells.
• Loss of principal. Property values can fall. You or your heirs can lose some or all of the money invested, and a lower value also means a lower stepped-up basis.
• Distributions are not guaranteed. Any distributions depend on property performance and can be reduced or suspended.
• Reliance on the sponsor. You do not control the property. The sponsor and its affiliates make the decisions on leasing, financing and the timing of a sale.
• Limited control. DST investors have no vote on operations. Under Revenue Ruling 2004-86, the trustee cannot renegotiate leases, take new loans or raise new capital, which limits how the trust can respond to problems.
• Fees and load. DST offerings include up-front costs (commissions, offering and organizational costs, financing fees) and ongoing fees that reduce the amount invested and any return.
• Leverage. Many DSTs use debt. Leverage magnifies losses as well as gains, and a loan default can cost investors their entire interest.
• Tax-law change. The step-up, the estate tax exemption, §1031 and the DST structure all depend on current law and IRS guidance, which can change.
• 721-specific risks. A 721 exchange gives up future 1031 eligibility for that capital, concentrates your holdings in one REIT, exposes you to REIT share price volatility once units are converted, and a conversion or sale of units is generally a taxable event during your life.

DST and 721 offerings are available only to accredited investors through a private placement memorandum, which describes the risks of each offering in detail and should be read in full.

Frequently asked questions

Does a 1031 exchange get a step-up in basis at death?

Under current law, yes. The replacement property you own at death gets a new basis equal to its fair market value on the date of death under IRC §1014. The gain you deferred through prior exchanges is not taxed to your heirs, and neither is the depreciation you took. Your heirs can sell soon after inheriting with little or no capital gains tax if the sale price is close to the date-of-death value. Congress has proposed limiting this before, and it could change.

Do heirs have to pay depreciation recapture on inherited rental property?

Generally no, under current law. Sections 1245(b)(2) and 1250(d)(2) exempt transfers at death from recapture, and the heir's basis resets to fair market value, so the depreciation history doesn't carry over. The heir can then depreciate the building portion of the new basis. Recapture does apply if the owner sells during life, including on accelerated depreciation from cost segregation, which is taxed as ordinary income.

What is the double step-up for community property in California?

When a married person in California dies, IRC §1014(b)(6) gives both halves of qualifying community property a new basis, not just the decedent's half. If a couple owns property worth $3 million with a $600,000 basis, the survivor's basis becomes $3 million. Holding the same property as joint tenants usually steps up only half, leaving the survivor with a $1.8 million basis. Title and the property's history determine whether it qualifies.

Is it better to gift a rental property or leave it in my will?

For appreciated property, leaving it at death is usually better for income tax under current law. A gift passes your low basis to the recipient (carryover basis), so they pay tax on the old gain when they sell. An inheritance gets a step-up to date-of-death value. Gifting can make sense for families well above the $15 million estate tax exclusion who want future growth out of their estate, which is a decision to make with an estate attorney.

What is the estate tax exemption in 2026?

The federal basic exclusion amount is $15 million per person for deaths in 2026, set by the One Big Beautiful Bill Act and confirmed in IRS Revenue Procedure 2025-32. It is indexed for inflation in later years and has no scheduled expiration, though Congress can change it. A married couple can shelter up to $30 million with a portability election on a timely filed Form 706. The top estate tax rate is 40%. Some states have their own estate taxes with lower exemptions.

Can my heirs split up my DST interests?

Usually, yes. DST interests can generally be re-registered from your estate or trust to each heir in the proportions your documents direct, so each heir owns his or her own interest and makes independent decisions when the property sells. Each sponsor has its own transfer forms and requirements, so your trustee should contact the sponsor's transfer agent early. The interests remain illiquid after transfer; heirs generally wait for the sponsor to sell the property.

Does a revocable living trust still get a step-up in basis?

Yes. Assets in a revocable trust are included in your gross estate, so they get a new basis at your death under §1014. A revocable trust also avoids California probate and its statutory fees. Irrevocable trusts are different: assets you gave away to an irrevocable trust and that are not in your estate generally keep their old basis, as the IRS confirmed in Revenue Ruling 2023-2.

What happens if I die before finishing my 1031 exchange?

Your estate or trust can generally complete the exchange within the original 45-day identification and 180-day exchange deadlines, which do not pause at death. If the exchange is completed, the replacement property gets a step-up like your other assets. If it fails, the sale gain must be reported, and whether it lands on your final return or becomes income in respect of a decedent depends on the facts. Your family should call the qualified intermediary and a CPA immediately.

If you're weighing whether to keep exchanging, sell or start shifting into something your heirs can split easily, I'm happy to walk through your numbers with you and your CPA.

Sources

• 26 U.S. Code §1014: Basis of property acquired from a decedent (Cornell LII)
• 26 U.S. Code §1015: Basis of property acquired by gifts (Cornell LII)
• 26 U.S. Code §1031: Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S. Code §1250: Gain from dispositions of certain depreciable realty (Cornell LII)
• 26 U.S. Code §2040: Joint interests (Cornell LII)
• IRS: IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill
• Journal of Accountancy: No basis step-up for grantor trust assets (Rev. Rul. 2023-2)
• Congressional Research Service: Tax Treatment of Capital Gains at Death (IF11812)
• Kiplinger: IRS updates capital gains tax thresholds for 2026
• Ginsburg Law Group: The California estate planning tax break many couples miss (community property basis)
• Jones Day: The One Big Beautiful Bill becomes law, real estate tax changes
• IRS Revenue Ruling 2004-86 (Delaware statutory trusts), Internal Revenue Bulletin 2004-33