Does property I acquired in a 1031 get a full step-up in basis at my death?

Section 1014 replaces the carried-over basis with market value

An exchange defers gain by giving the replacement the old property's basis, adjusted for cash and debt, under section 1031(d). Exchange several times and the basis of the current property can be a fraction of its value. See basis in replacement property after a 1031 for how that number is built.

At death a different rule takes over. Section 1014(a)(1) sets the basis of property acquired from a decedent at 'the fair market value of the property at the date of the decedent's death', or at the alternate valuation date if the executor elects it under section 2032. The statute makes no exception for property acquired in an exchange.

The deferred gain is therefore not passed on; it disappears. That is the reason behind the strategy of exchanging until death, discussed in swap till you drop planning.

Depreciation recapture disappears too, and heirs start fresh

The recapture rules have their own exception. Section 1245(b)(2) and section 1250(d)(2) both say the recapture subsection 'shall not apply to a transfer at death', except for income in respect of a decedent. So the depreciation you deducted across a chain of exchanges is not recaptured at death.

Heirs then depreciate the building from the new basis, and a sale soon after death is long-term: under section 1223(9), a person whose basis is determined under section 1014 who sells within one year 'shall be considered to have held such property for more than 1 year.'

The one carve-out that matters for sellers is section 1014(c): the reset does not apply to income in respect of a decedent. An installment note from a sale you made before death is that kind of right, so the gain inside the note does not step up.

How much steps up depends on how title is held

The basis reset follows estate inclusion. Property you own alone is fully included under section 2033 and fully stepped up. For spouses holding as joint tenants with right of survivorship or tenants by the entirety, section 2040(b) includes 'one-half of the value', so only the decedent's half steps up and the survivor keeps the old basis on the other half.

Community property gets more. Section 1014(b)(6) extends the reset to 'the surviving spouse's one-half share of community property' if at least half of the community interest was includible in the decedent's estate. IRS Publication 551 puts it plainly: 'the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property.'

Delaware Statutory Trust interests follow the same rules. The IRS treats a DST investor as owning the trust's assets attributable to that interest, as Rev. Rul. 2004-86 explains, so heirs take a market value basis in the interest; how heirs handle DST interests covers what happens next.

Worked example: four exchanges, one step-up

Hypothetical, round numbers; run your own numbers with your CPA. You bought a rental for $300,000 in 1996 and exchanged four times. Your current property is worth $2,000,000 and its adjusted basis, after carryover and $400,000 of depreciation, is $350,000. Selling today would mean $1,650,000 of gain.

You die owning it alone. Your heirs' basis is $2,000,000. If they sell for $2,000,000 a month later, there is no gain and no recapture. If they keep it, they depreciate the building portion of $2,000,000 again.

Had you owned it with your spouse as joint tenants in a common law state, only your half would reset, giving a combined basis of about $1,175,000 ($1,000,000 plus half of $350,000). As community property, both halves would reset to $2,000,000.

• Sole ownership: basis $2,000,000, deferred gain eliminated.
• Joint tenancy with spouse: about $1,175,000, half the deferred gain remains with the survivor.
• Community property: $2,000,000 for both halves.

Keep the estate side in view

The step-up comes from estate inclusion, so the full value counts toward estate tax. For 2026 the basic exclusion amount is $15,000,000 under Rev. Proc. 2025-32; estates above it pay tax on the excess, and estates that must file a return must give heirs basis statements under section 6035, with the heirs' basis capped at the reported value under section 1014(f).

Gifts during life do not get the reset; a gift carries your basis. And under section 1014(e), property given to a dying person within one year of death and inherited back by the donor keeps the decedent's old basis.

If you plan to hold until death, the question becomes what to own in the meantime. Many owners move from hands-on rentals into Delaware Statutory Trust interests so the property is easier to divide among heirs. The full comparison is in holding for the step-up versus exchanging.