Does a transfer-on-death deed affect my ability to 1031?

The deed gives the beneficiary nothing until you die

States that adopted the uniform real property transfer on death act use nearly identical language, and Virginia's is typical. Section 64.2-625 makes the deed revocable even if it says otherwise, and section 64.2-631 says that during your life it does not affect your interest or your right to transfer or encumber the property, and does not create any legal or equitable interest for the beneficiary.

That is why the exchange is unaffected. Section 1031 asks whether you held the relinquished property for business or investment and whether you acquire like-kind replacement property; a revocable designation of who gets it later answers neither question.

The income tax treatment matches. A revocable designation is not a gift, and you keep reporting the rents, depreciation and the eventual sale or exchange on your own return.

Selling the property ends the designation, and it does not jump to the replacement

Under section 64.2-632, the transfer happens at death only for property "owned by the transferor at death." Section 64.2-630 lists an inter vivos deed that conveys the property so you no longer own it at death as one of the instruments that revoke a recorded transfer-on-death deed.

So the moment your relinquished property closes, its designation is gone. Exchange proceeds held by the intermediary and the replacement you buy with them are not covered by the old deed.

The requirements for a new deed are set by the state where the replacement sits. Virginia, for example, requires that the deed be recorded in the land records before death under section 64.2-628; other states have their own forms, and some states do not offer transfer-on-death deeds at all, so check the replacement state before closing.

Worked example: an exchange across county lines needs a second deed

Hypothetical; run your own numbers with your CPA and confirm the forms with a local attorney. You own a rental worth $800,000 with a $300,000 adjusted basis and a recorded transfer-on-death deed naming your daughter. You sell it in 2026 and exchange into a $900,000 rental in another county.

The $500,000 gain is deferred, and the replacement takes a carryover basis of about $400,000 after the $100,000 you added. Your old deed lapsed at the sale, so unless you record a new one on the replacement, it passes under your will or by intestacy.

If you record the new deed and die owning the replacement, your daughter takes it outside probate with a basis equal to its fair market value at your death. The $500,000 of gain you deferred is never taxed.

• Old deed: revoked by the sale.
• New deed: record it on the replacement before death.
• Basis to your daughter: date-of-death value, not $400,000.

The beneficiary gets a stepped-up basis because the property stays in your estate

Because you keep full ownership and the power to revoke, the property is part of your gross estate under section 2033. Reg. section 25.2511-2(c) treats a transfer as an incomplete gift when the donor keeps the power to revest title, so recording the deed is not a taxable gift.

Inclusion in the estate means section 1014 gives the beneficiary a basis equal to fair market value at death. That is the same step-up a will would deliver, and it is the reason holding exchanged property for life works with this kind of deed.

Contrast an outright deed to your child during life. That is a completed gift with carryover basis under section 1015, as covered in gifting replacement property.

What to do, and what changes if the replacement is a trust interest

Put a reminder in your exchange file to record the new transfer-on-death deed right after the replacement closes, naming the same beneficiaries if that is still your plan. If you take title in an LLC, the deed approach no longer works on the real estate; the membership interest passes under the LLC's own documents, a point covered in moving from your own name into an LLC.

A transfer-on-death deed works only on real property recorded in a county's land records. A Delaware statutory trust interest, which Rev. Rul. 2004-86 treats as an interest you can acquire in a 1031 exchange, is a beneficial interest in a trust rather than a recorded parcel, so you need another way to direct it at death.

Common choices are holding the interest in a revocable living trust or naming beneficiaries through whatever transfer method the offering documents allow; see holding a DST interest in an LLC or trust and transferring DST interests to heirs.