Keep My Rentals for the Step-Up vs Sell and 1031 Now: Which Is Better?

Step-up resets basis to date-of-death value, so a thirty-year 1031 chain's deferred gain is never taxed

§1014(a)(1) gives a person acquiring property from a decedent a basis equal to 'the fair market value of the property at the date of the decedent's death.' Your carryover basis, the depreciation you took, and the gain you deferred in each prior exchange are not inherited; only the property and its current value are.

Hypothetical: a building worth $1,500,000 with an adjusted basis of $100,000 after two exchanges and years of depreciation. Sold today by a married couple, the $1,400,000 gain would cost roughly $75,000 on $300,000 of unrecaptured §1250 gain at 25%, about $220,000 on the remaining $1,100,000 at the 20% rate that applies above $613,700 of taxable income in 2026, and $53,200 of 3.8% net investment income tax, about $348,000 before state tax. Inherited instead and sold by the heirs at $1,500,000 a month later, the gain is zero.

Depreciation also restarts for the heirs on the $1,500,000 basis over 27.5 years for residential property, though §179(d)(2)(C)(ii), which §168(k)(2)(E)(i) incorporates, denies bonus depreciation on property whose basis comes from §1014.

Three paths side by side: exchange into DSTs, sell and buy securities, or hold what you have

Each path ends with a step-up, because §1014 applies to securities as well as real estate; what differs is how much tax leaves on the way and how much work remains.

• Exchange now into DSTs: no tax today; income from sponsor-managed property; no tenants; heirs receive the DST interests at date-of-death value and can sell or exchange them; interests are illiquid until the trust sells.
• Sell now, invest in securities: about $348,000 of the example's $1,500,000 leaves as federal tax; the remaining portfolio is liquid and diversified; heirs step up whatever is left.
• Hold the existing rentals: no tax, no change; you keep the management and the single-market risk until death, and any needed cash comes from rent or borrowing.

Stop exchanging and simply hold when the current property already fits the rest of your life

Another exchange is worth its cost when it changes something you need changed: workload, income, debt, or geography. If the property is paid off, well tenanted and near you, the exchange adds deadlines and closing costs for no operational gain, and holding to death reaches the same tax result.

Exchange when the opposite is true: a roof and a boiler are due, the property is three states away, or the income is thin against the equity. In that case the DST structure gives income without a manager, and a cash-out DST can absorb high debt so the exchange balances without new borrowing.

Cash-flow needs, health and estate size each push the decision a different way

Cash needs: DST offerings state their projected distributions in the offering documents, and a sale of securities can fund any amount at any time; a held rental funds spending only through rent or a loan. Health: an exchange takes up to 180 days, and if death intervenes, qualified-intermediary guidance such as IPX1031's states that heirs can complete the exchange and still receive a stepped-up basis on the replacement, but the published authority is thin, so an owner in poor health should have counsel confirm the plan before the relinquished property closes.

Estate size: the basic exclusion amount is $15,000,000 per person for deaths in 2026, so a couple can hold $30,000,000 before federal estate tax matters. Above that, holding appreciating real estate grows a taxable estate, and the income-tax saving from the step-up has to be weighed against estate tax on the same value.

Dying mid-exchange or just after closing: what the estate does next

Neither §1031 nor its regulations contain a rule for a taxpayer who dies between the sale and the purchase, and the estate is a separate taxpayer that files Form 1041 under Pub. 559. Intermediaries report that the personal representative completes the exchange within the original 45- and 180-day windows using the decedent's exchange agreement; whether the replacement property then takes a §1014 basis is the question to put to your attorney in writing.

Dying shortly after a replacement closes is simpler: the replacement is property owned at death and steps up under §1014 like any other asset. If the estate must file Form 706, Form 8971 reports each beneficiary's basis and §1014(f) caps it at the estate-tax value.

DSTs and UPREITs in a swap-till-you-drop plan: heirs get the step-up, but a 721 closes the exchange door

Rev. Rul. 2004-86 treats a DST interest as an undivided interest in the trust's real estate, so it steps up at death exactly as a deeded building does, and heirs who want out can wait for the trust to sell or run their own exchange at that point. Splitting one large exchange across several trusts also lets each child inherit a different interest instead of a shared building; the sponsor's role page explains who manages each trust.

A sponsor's 721 program converts the DST interest into operating partnership units of a REIT; those units also step up at death, but §1031(a)(2) excludes partnership interests from like-kind treatment, so neither you nor your heirs can exchange out of them later. Choose it for liquidity and diversification, not as a way to keep exchanging.

Legislative risk: what has been proposed, and what the law says today

The Treasury's FY2025 Green Book proposed limiting like-kind deferral to $500,000 per taxpayer ($1,000,000 joint) per year and treating transfers at death as realization events; neither became law, and the 2025 tax act instead fixed the estate exemption at $15,000,000. Proposals like these recur, so a balanced plan keeps flexibility: DST interests can be sold or exchanged if the rules change, while a completed taxable sale cannot be undone. Confirm any step of this with your CPA or attorney, because the right answer depends on your basis, your state and your health.