The property is still in my deceased parent's name. Can I do a 1031 exchange?

The step-up in basis often removes the reason to exchange

Section 1014(a) gives property acquired from a decedent a basis equal to its fair market value at the date of death, or at the alternate valuation date if the executor elects it under section 2032. The parent's depreciation and original cost drop away, and with them most of the built-in gain.

Section 2032 is narrow. It values property six months after death, or on the date it is sold or distributed within those six months, and under section 2032(c) it can be elected only if it decreases both the gross estate and the estate tax. Most estates value at the date of death.

Holding period is not a problem either. Section 1223(9) treats a person who acquires property from a decedent with a section 1014 basis as having held it for more than one year, even if it is sold within a year.

The taxpayer is whoever owns the property when it sells

A deed still in the parent's name does not mean the parent is the seller. Depending on state law and how the parent held title, ownership has passed to the estate, to a trust, to a surviving joint owner or to the heirs, and the closing documents will be signed by whoever has authority: an executor, a trustee or the heirs themselves.

That owner is the taxpayer for the exchange. If the estate sells, the estate, as its own taxpayer, must acquire the replacement. If the property is first deeded to the heirs, each heir is a separate taxpayer and can exchange, or not, with their own share. The executor's guide and splitting inherited property among siblings cover both paths.

Probate timing drives the choice. An estate that sells before distribution must run the exchange on its own 45-day and 180-day clock and hold the replacement until it is distributed; heirs who take title first gain flexibility but must wait for the deed.

A worked example: how little gain may be left

Hypothetical: your parent bought a rental decades ago for $150,000 and took $100,000 of depreciation. It was worth $700,000 at death. Two years later the estate, or the heirs, sell it for $760,000 with $40,000 of selling costs.

• Basis after death: $700,000, not the parent's $50,000 adjusted basis.
• Gain on sale: $760,000 minus $40,000 minus $700,000 equals $20,000.
• Depreciation recapture from the parent's years: gone with the step-up.
• If the property was rented after death, depreciation taken since then reduces basis and adds to the gain.
• On $20,000 of gain, the cost and constraints of an exchange may outweigh the tax deferred. Run your own numbers with your CPA.

When an exchange still makes sense

An exchange earns its cost when the property has gained a lot since the date of death, for example when an estate stays open for years in a rising market or the heirs rent the property for a long time before selling. The deferral then protects gain that arose in the new owners' hands.

It also fits heirs who want to stay invested in real estate but not manage this property. Each heir who takes title can exchange separately, including into a DST interest held in their own name; DSTs for inherited property explains that path. The full set of options for an inherited rental compares exchanging, selling outright and keeping it.

What to collect before you list

The basis number is the first thing everyone will ask for, and it should be settled before a buyer is found. IRS Publication 551 explains that when an estate tax return is required, beneficiaries generally receive a Schedule A of Form 8971 reporting the estate tax value, and that certain beneficiaries must use that value as their basis.

• A date-of-death appraisal, or the value reported for estate tax purposes.
• Letters testamentary or the trust documents showing who can sign the deed.
• A decision on whether the estate or the heirs will sell, made before the listing.
• Any Schedule A of Form 8971 issued to the heirs.
• A CPA's estimate of the gain at the expected price, so you can judge whether an exchange is worth setting up.