1031 Exchange for Seniors: Planning the Final Exchange

Plan the last exchange from the date of death backwards, because that is when the gain disappears

Section 1014(a) gives property acquired from a decedent a basis equal to its fair market value at death, and Publication 559 adds that the heirs are treated as having held it for more than one year. Every exchange you have done since the first building rolled its gain forward into the next basis; at death that chain is cut and the accumulated gain is simply gone.

A taxable sale at 80 pays all of it now. Depreciation you have claimed over decades comes back as unrecaptured section 1250 gain taxed at 25 percent under section 1(h), the rest is taxed at 15 or 20 percent, and the 3.8 percent net investment income tax applies above $250,000 of modified adjusted gross income on a joint return or $200,000 on a single one. The 20 percent rate starts at $613,700 of taxable income for joint filers and $545,500 for single filers in 2026 under Rev. Proc. 2025-32.

So the final exchange is not really about deferral; it is about never paying. The pages on holding for the step-up and swap till you drop run the long-horizon math. What follows are the decisions that differ when the exchanger is 78 rather than 48.

Decide building by building: exchange the ones with the most gain, sell the ones with the least

Older owners often hold several properties with very different histories. A fourplex bought in 1985 with a basis near zero is the one to exchange, because its taxable sale would be almost all gain and recapture. A rental bought six years ago with modest appreciation may be the one to sell outright, because the tax is small and the cash is useful for care, gifts or simply living.

The exchange does not have to be all or nothing. Selling one property for cash and exchanging another keeps liquidity in hand while the big gain stays deferred, and a partial exchange that takes some boot is taxed only on the boot. The deciding question for each parcel is how much tax a sale triggers against how much income and simplicity the replacement delivers for the years that remain.

Take no debt into the final exchange, and keep the replacement in your own name

Debt is the first thing to remove. A mortgage on the replacement adds a loan maturity inside a hold that may end at death, and a DST with a loan can produce taxable income without cash in late years as the loan amortises. An all-cash replacement avoids both. The debt-replacement rule only requires you to replace the debt paid off at sale, and the pages on debt-free DSTs and the financed versus all-cash decision show how to meet it with cash from outside the exchange rather than with a new loan.

Keep the replacement titled the way the relinquished property was titled: you, you and your spouse, or your revocable trust. The same-taxpayer rule forbids putting the replacement in a child's name, and a revocable trust is disregarded while you live, so the trustee's exchange is yours and the step-up still arrives at death.

A DST interest is illiquid: there is no public market, the manager decides when the property sells, distributions can fall or stop, and you can lose principal. For a final exchange those risks are weighed against the risks of a building you manage yourself at 80, including the one that nobody can sign for you when a tenant leaves or a roof fails.

A DST interest has no required minimum distributions and does not count against your IRA rules

Retirees sometimes confuse the two account types. Required minimum distributions apply to traditional IRAs, SEP and SIMPLE IRAs and employer plans such as 401(k), 403(b) and 457(b) plans, generally from age 73, with a 25 percent excise tax on amounts not withdrawn, reduced to 10 percent if corrected within two years. A DST interest bought with 1031 proceeds is held outright, not in a retirement account, so there is no required withdrawal, no excise tax and no forced sale of an illiquid interest to meet one.

Accreditation is tested on the investor, not the family. Under Rule 501(a) a natural person qualifies with net worth above $1,000,000 excluding the primary residence, or income above $200,000 single or $300,000 joint in each of the two most recent years with the same expected this year. A retiree with modest income usually qualifies on net worth, because the equity in the rentals being sold counts, as do IRAs and brokerage accounts.

Hypothetical: a 78-year-old's $1,200,000 fourplex, sold against exchanged

Round numbers, hypothetical: a widow of 78 bought a fourplex for $500,000, has taken $300,000 of depreciation, so her adjusted basis is $200,000, and can sell for $1,200,000. A taxable sale shows $1,000,000 of gain. The $300,000 of depreciation is taxed at 25 percent, $75,000. The remaining $700,000 is taxed at 15 percent up to the $545,500 single-filer threshold and 20 percent above it, somewhere between $105,000 and $140,000 depending on her other income. The 3.8 percent tax adds up to $38,000. Call it $220,000 to $250,000 of federal tax, before any state tax, leaving roughly $950,000 to invest.

If she exchanges the full $1,200,000 into an all-cash DST interest and dies at 86 holding it, her children inherit the interest at its value that day and owe nothing on the $1,000,000 of gain or the $300,000 of recapture. If the interest is worth $1,200,000 then, each of three children can take a $400,000 share, keep it, sell it or exchange it again on their own timetable.

If instead she needs $300,000 of the proceeds for care, she can sell one smaller property outright for that cash and exchange only the fourplex, or take $300,000 of boot from the fourplex sale and pay tax on that slice only. Run both versions with her CPA; the right answer depends on her other income, her state and how much cash the next eight years actually need.

A charitable remainder trust is the other final-exchange tool, and it answers a different question

A charitable remainder trust also avoids tax on the sale, but by a different route and with a different ending. Under section 664 the trust itself pays no income tax when it sells, it pays you a fixed percentage between 5 and 50 percent a year for life or for a term of up to 20 years, and at least 10 percent of what you contribute must be projected to reach the charity. The property is out of your estate, so there is no step-up for your children; they receive nothing from it unless you buy life insurance with the income.

The exchange keeps the asset for the family and the trust gives the remainder away. Owners with no heirs, or with a charity they already fund, often prefer the trust; owners whose aim is to pass the building's value to children prefer the exchange. The CRT comparison page runs the numbers and the income-ordering rules; some families use both, one property to the trust and the rest through the exchange.

Whatever you choose, name a trusted contact. FINRA Rule 4512 requires the broker-dealer to make reasonable efforts to obtain a trusted contact person aged 18 or older, whom the firm may call to confirm your health status, to identify a guardian, executor, trustee or holder of a power of attorney, or to address possible financial exploitation. Naming an adult child there, and giving that child a durable power of attorney, is what lets the plan continue if you cannot sign; the page for adult children helping a parent sell covers who may sign and what the intermediary will ask for.