Executor Selling an Estate's Rental: Step-Up, Timing and Whether to Exchange at All

The step-up usually leaves nothing worth deferring, so start by measuring the gain since death

Section 1014(a) sets the basis of property acquired from a decedent at its fair market value on the date of death, and section 1014(b)(1) applies that rule to property the estate itself holds. Whatever the decedent paid, and whatever depreciation the decedent claimed, stops mattering on that date. The estate's gain is the sale price, less selling costs, less the date-of-death value.

Section 1223(9) treats property with a section 1014 basis as held for more than one year, so even a sale a few months after death is long-term. IRS Publication 559 restates both rules for personal representatives and confirms that the estate reports the gain or loss on its own return.

That is why a listing in the first year after death rarely justifies an exchange. A commission and closing costs often exceed the appreciation since death, producing a small loss rather than a gain, and the tax page on an estate's sale before distribution explains where that loss goes. If there is no gain, an intermediary has nothing to defer.

Two cases break the pattern. The first is an estate that stayed open for years because of litigation, a missing heir or a slow ancillary probate, during which the rental appreciated. The second is a decedent who died within a year of receiving the property as a gift from the person who now inherits it back: section 1014(e) denies the step-up in that case, and the donor's old basis survives.

Alternate valuation and the appraisal set the number you will defer or pay tax on

If the estate files Form 706, the executor may elect alternate valuation under section 2032. Property still held six months after death is valued on that date; property sold inside the six months is valued at its sale price, which by definition leaves no gain on that sale. Section 2032(c) allows the election only when it lowers both the gross estate and the estate tax, so it exists for taxable estates whose values fell.

In the far more common estate that files no Form 706, nothing fixes the basis except evidence. A qualified appraisal dated to the date of death is the document the estate's CPA will ask for, and it is also the document a later buyer's lender and the heirs' own preparers will want. Order it before you list, because the asking price and the appraisal should not contradict each other.

Whether a quick sale leaves anything to defer under alternate valuation is covered in selling inherited property within six months. Property the decedent acquired through an earlier exchange gets the same reset, and the gain deferred in that exchange disappears with it.

Your authority to sell comes from the will and the probate court, and the exchange clock does not wait for either

A personal representative sells under the will's power of sale or under a court order. Florida is a clear example: Florida Statutes section 733.613 lets a representative sell, mortgage or lease real property without court authorization when the will confers a power of sale, but where the will gives none, no title passes until the court authorizes or confirms the sale. Other states draw the same line with different procedures, so read your letters and the will before signing a listing.

If the estate exchanges, the deadlines in section 1031(a)(3) are the ordinary ones: identification within 45 days of the transfer and receipt within 180 days or the due date of the estate's return, whichever is earlier. Nothing in the statute or in Reg. section 1.1031(k)-1 extends those periods for probate delays, court hearings or an heir's objection.

The same-taxpayer rule follows the deed. If the estate conveys the relinquished property, the estate must take title to the replacement; an heir cannot step in as buyer. The estate can later distribute the replacement to the heirs, but plan that sequence with counsel before the sale closes rather than after. An owner who died while an exchange was already running is a different problem, handled in the executor's guide to finishing an exchange and in the owner died mid-exchange.

Worked model: the same house, two probate timelines, two different answers

Hypothetical, round numbers. A rental was appraised at $900,000 on the date of death. In the first timeline the estate sells it 14 months later for $950,000 with $55,000 of commissions and closing costs. Amount realized is $895,000 against a $900,000 basis: a $5,000 loss, no tax, and no reason to involve an intermediary.

In the second timeline a will contest keeps the estate open for five years. The property is now worth $1,300,000, the estate has taken $90,000 of depreciation on the stepped-up basis, and the net sale price after costs is $1,230,000. Gain is $1,230,000 less an adjusted basis of $810,000, or $420,000, of which $90,000 is unrecaptured section 1250 gain taxed at up to 25 percent and $330,000 is long-term gain.

Rev. Proc. 2025-32 puts the estate's 15 percent capital gain band at only $16,250 of taxable income for 2026, so gain the estate keeps is taxed at 20 percent almost from the first dollar, roughly $88,000 of federal tax on these figures, while gain carried out to the heirs in the estate's final year is taxed at their own brackets, roughly $72,000 if they sit in the 15 percent band. Net investment income tax and state tax come on top. That difference of tens of thousands of dollars is what an exchange would defer, and the estate's CPA should run the exact split before anyone signs a listing.

The path: distribute first, exchange inside the estate, or simply sell

If the heirs want cash, sell and distribute. If one heir wants to keep real estate exposure and the others want cash, deeding the property to the heirs as tenants in common before the sale lets each one decide alone, as splitting title among siblings describes; each heir's basis is the same date-of-death value, so the cash heirs owe little.

If the heirs want income without a tenant, and the gain since death is real, the estate can exchange into DST interests. Rev. Rul. 2004-86 treats each beneficial owner as owning an undivided fractional interest in the trust's real estate, so the interest is like-kind to the rental and the trustee rather than the estate deals with the property. An estate with no mortgage to replace is normally placed in an all-cash traditional DST; a financed trust only matters when the estate paid off a loan at closing.

Tell the heirs plainly what they are getting. A DST interest is a private placement with no public market, the trust sells when the sponsor decides, distributions can be reduced or stopped, and the principal can be lost. DSTs as estate liquidity versus real property weighs that against the expenses an estate must still pay.