Using 1031, DSTs and UPREITs in 'Swap Till You Drop' Estate Planning

The math behind the strategy: a $3,000,000 property with a $200,000 basis costs about $696,400 to sell and nothing to bequeath

Take a hypothetical owner who bought a rental for $500,000 in 1995, exchanged twice, and now holds a $3,000,000 property with a $200,000 adjusted basis after $600,000 of depreciation across the chain. A sale this year recognizes $2,800,000: 25% on the $600,000 of unrecaptured §1250 gain ($150,000), 20% on the remaining $2,200,000 ($440,000) and 3.8% NIIT on the whole gain ($106,400), about $696,400 of federal tax before state tax.

If the same owner dies holding the property, the heirs' basis becomes $3,000,000 under §1014(a), a sale the next month produces roughly no gain, and the $600,000 of depreciation is never recaptured. A $3,000,000 estate is far below the $15,000,000 exclusion, so there is no estate tax either.

That asymmetry, roughly $700,000 of tax that disappears with one more exchange, is the whole strategy. It rewards patience and punishes a taxable sale late in life, which is why the 1031 vs hold for step-up guide treats timing as the main variable.

Which wrapper you die holding: direct property, a DST interest or 721 units all reset, but they divide and exit differently

Direct ownership is the simplest for basis and the hardest for heirs, who inherit a building to manage or sell together. A DST interest resets the same way, since under Rev. Rul. 2004-86 each investor is treated as the owner of an undivided slice of the trust's property, and it arrives pre-divided, with heirs able to keep, sell or exchange at the trust's sale, as heirs exchanging out of a DST explains.

A 721 roll-up converts the DST or building into operating-partnership units without gain under §721(a). At death the units are reset as a partnership interest, and if the operating partnership has a §754 election in effect, §743(b) also lifts the heirs' share of the partnership's inside basis, so a later redemption produces little gain.

The price of the 721 route is finality: units are a partnership interest, which §1031(a)(1) excludes because it reaches only real property, and the after a 721 page explains why no further exchange is possible. Choose it when you want the estate to hold something heirs can sell in pieces and never manage, not when a child intends to keep exchanging.

• Direct: one deed, co-ownership among heirs or a forced sale; a partition action is the fallback.
• DST: the sponsor re-registers fractional interests to each heir, and each decides independently at the trust's sale.
• OP units: transferable units redeemable for cash or REIT shares under the partnership agreement, with gain measured only from the date-of-death value.

Death in the middle of an exchange or a roll-up: what the estate can finish and what to avoid leaving half-done

If you die after the relinquished property closes but before the replacement is bought, the deferred gain is sitting in a qualified intermediary's account with a 180-day clock running. The estate or successor trustee steps in as the taxpayer; the executor's guide walks through completing an exchange in progress, and your QI agreement should name who has authority to sign.

The basis result for an exchange that straddles a death is not something to leave to inference: have counsel confirm how the estate will report it. An older exchanger should prefer replacement property that can close quickly, such as a DST interest, so the exposed window is short.

A 721 contribution has no clock and no intermediary, so death during a roll-up leaves either the DST interest or the units in the estate, and each resets under §1014. Death inside the DST's holding period, before any roll-up is offered, leaves the heirs with the DST interest and every option still open.

Titling decisions that change how much resets: community property, joint tenancy and gifts within a year of death

In a community-property state, §1014(b)(6) resets both halves of community property at the first spouse's death, so the survivor can sell without gain; joint tenancy resets only the decedent's included share, as Publication 551 explains. Married owners who exchanged into DSTs should title the interests as community property, not as joint tenants, if the goal is a full reset on the first death.

A revocable living trust does not disturb the reset, because §1014(b)(2) and (b)(3) cover property the decedent could revoke or amend. An irrevocable trust that keeps the property out of your estate destroys it: Rev. Rul. 2023-2 confirms no §1014 adjustment for assets not included in the gross estate, so estate-tax savings and the income-tax reset trade against each other above the exclusion.

Do not gift a low-basis property to a dying relative expecting it back reset: §1014(e) gives appreciated property gifted within one year of death, and returning to the donor, the decedent's old basis instead.

Estate tax versus income tax: above $15,000,000 the 40% rate can outweigh the step-up, below it the step-up wins

The 2026 basic exclusion is $15,000,000 per person under §2010(c)(3) as amended in 2025 and indexed from 2027, and the rate above it is 40% under §2001(c). For a couple with $6,000,000 of real estate, there is no estate tax and the only planning question is income tax, which the reset answers.

For a $40,000,000 estate, every dollar of appreciated property kept in the estate to earn a reset also carries a 40% estate-tax cost, which exceeds the 20% to 28.8% federal income-tax rates the reset avoids. Families at that level often move assets out of the estate through irrevocable trusts, accept the lost reset, and use exchanges inside the trust to defer, which the no-step-up trust guide covers.

Concentration is the other trade-off: a chain of exchanges tends to end in one large asset, and a plan that depends on holding it until death should hold something heirs can carry. Diversified DST or REIT exposure late in the chain reduces the single-tenant, single-market risk that the DST risks page describes.

Five questions to settle with heirs and advisers while you can still change the answer

The plan fails most often on paperwork, not on tax law. Settle these points in writing and revisit them at every exchange.

• Who has authority to finish an exchange if you die inside the 180 days, and whether the QI agreement and your power of attorney say so.
• Whether each replacement is titled to you, to a revocable trust or as community property, and whether any irrevocable trust in the plan is expected to get a reset it cannot have.
• Whether the operating partnership behind any 721 program has a §754 election in place, so heirs receive the inside-basis adjustment under §743(b).
• Which heirs want income, which want cash and which want to keep exchanging, because a DST basket can serve all three and a single building cannot.
• Where the deeds, PPMs, exchange files and depreciation schedules are, because the heirs' basis under §1014(f) must match the values the estate reports.