In short
How carried-over basis under section 1031(d) meets the date-of-death basis rule in section 1014, the 2026 estate exclusion, and what does not get the step-up.
“Swap till you drop” is shorthand for two code sections working together. Section 1031 lets you carry a low basis from one property to the next, exchange after exchange, without paying tax on the gain. Section 1014 then gives your heirs a basis equal to fair market value at your death. The deferred gain is never recognized by anyone. This is the five-minute version; the full decision model is in our guide to exchanging versus holding for the step-up.
The two sections that do the work
Section 1031(d) sets the basis of the replacement property at the basis of the property you gave up, decreased by any money received and increased by any gain recognized. Your original cost, less all the depreciation you have taken, rides along into each new property. That is why the gain keeps growing and the basis keeps shrinking across a chain of exchanges; see basis in replacement property after a 1031.
Section 1014(a)(1) resets the basis of property “acquired from a decedent” to “the fair market value of the property at the date of the decedent’s death.” The low basis you carried for decades is replaced by what the property is worth on that day. If the executor elects alternate valuation under section 2032, the value six months after death is used instead, but only if the election decreases both the gross estate and the estate tax.
For married couples in community property states, section 1014(b)(6) treats the surviving spouse’s half of community property as acquired from the decedent too, so both halves reset. In other states only the decedent’s share resets.
A worked example
A hypothetical couple bought a rental in 2000 for $500,000 and exchanged it in 2015 into a $1,500,000 building, carrying an adjusted basis that, after years of depreciation, now stands at $250,000. In 2026 the building is worth $2,500,000.
Sell during life and the gain is $2,250,000. The part attributable to depreciation is unrecaptured section 1250 gain taxed at up to 25 percent. The rest is long-term capital gain; for 2026, Rev. Proc. 2025-32 puts the top of the 15 percent bracket at $613,700 of taxable income for a joint return, so most of this gain would be taxed at 20 percent. Add the 3.8 percent net investment income tax under section 1411 on the amount above the $250,000 joint threshold, and state tax where it applies.
Hold until death instead, and the heirs take a basis of $2,500,000. If they sell the next month for $2,500,000 the gain is zero. The $2,250,000 of deferred gain, including every dollar of depreciation recapture, disappears. Run your own numbers with your CPA; the figures above are round and ignore selling costs.
Estate tax: the 2026 exclusion
The trade-off used to be estate tax. For 2026 the basic exclusion amount under section 2010(c)(3) is $15,000,000, set by section 70106 of Public Law 119-21 and confirmed in Rev. Proc. 2025-32, with inflation adjustments after 2026. A surviving spouse can also use the deceased spouse’s unused exclusion under section 2010(c)(4) if the executor files an estate tax return and elects portability. Below those amounts the step-up comes with no federal estate tax. State estate taxes are a separate question.
What does not get a step-up
The rule is narrower than people assume, and these are the common gaps:
- Assets in an irrevocable grantor trust that are outside the estate. In Rev. Rul. 2023-2 the IRS held that where the grantor’s completed gift to such a trust keeps the assets out of the gross estate, “the basis of Asset is not adjusted to its fair market value on the date of A’s death.” Moving property into that kind of trust for estate purposes gives up the step-up; see no step-up trusts and 1031.
- Property given to the decedent within a year of death that comes back to the giver. Section 1014(e) denies the step-up where appreciated property was acquired by the decedent by gift within one year before death and passes back to the donor or the donor’s spouse.
- Basis above the estate tax value. Section 1014(f) caps the heirs’ basis at the value finally determined for estate tax purposes where a return is required.
- The surviving joint owner’s own share in a non-community-property state keeps its old basis.
Where DSTs fit in the last leg
An exchange chain has to end in something the owner can hold until death without managing it. A DST interest is an interest in real property under Rev. Rul. 2004-86, so it takes the exchange proceeds, and at death it is property acquired from the decedent like any other. Our pages on DSTs in estate planning and what heirs can do with a DST cover the mechanics. The one caution is section 1031(f): an exchange with a related party, followed by a disposition within two years, undoes the deferral, and death is among the listed exceptions, not a cure for a transfer made beforehand.
What to do now
- Pull your depreciation schedule and compute the adjusted basis you are carrying; the gap between that figure and today’s value is what the step-up would erase.
- Check how title is held. Community property, joint tenancy and trusts each change which share resets.
- If any property sits in an irrevocable trust, ask your estate attorney whether it is in or out of the gross estate before you count on section 1014.
- If management is the reason you want to sell, read the DST versus hold guide and start a plan that ends in property you can hold.
