Swap Till You Drop — 1031 Exchanges and the Step-Up in Basis

The mechanics

Every exchange rolls your gain forward into a lower carryover basis. Chain exchanges for 30 years and that hidden gain can dwarf your original investment. Then the punchline: under current law, property owned at death passes to heirs at its fair market value — the "step-up in basis." The deferred gain, all of it, simply ceases to exist for income tax purposes. Your heirs can sell the next day and owe little or nothing, and depreciation recapture dies with the basis too.

Example An investor turns a $200,000 rental into a $2.5M portfolio across four exchanges over 35 years, with $1.8M of deferred gain and recapture accumulated. At death, the heirs receive the properties at $2.5M basis. The $1.8M tax liability — call it $450,000+ — vanishes. Selling in year 34 instead would have paid it in full.

What the strategy requires

Never needing to sell. Refinancing can extract cash tax-free along the way (see refinancing around exchanges), which is how holders fund life without triggering the gain.
Management you can sustain into old age — which is why the final exchange is often into a passive DST.
Estate planning attention: the step-up interacts with estate tax thresholds, community property rules (spouses in community property states can get a full step-up at the first death), and how the property is titled. This is coordinated-professional territory.

The honest caveats

The step-up is current law, and proposals to limit it surface regularly in Washington. A strategy spanning decades is exposed to legislative change. And deferral means holding real estate through every cycle in between — the tax tail shouldn't wag the investment dog. But as the rules stand, this is the single most powerful outcome in the 1031 playbook.

See what one link in the chain defers →Each exchange in the chain compounds — start with your current numbers

Common Questions

Does the step-up in basis really erase depreciation recapture too?

Yes. The step-up resets basis to market value at death, and the recapture liability tied to the old basis disappears with it under current law.

What happens if Congress eliminates the step-up?

The deferred gain would then be taxed under whatever rules replace it — proposals have ranged from carryover basis to taxing gains at death. It is the key legislative risk of the strategy, worth monitoring but impossible to predict.

Do both spouses' halves get stepped up?

In community property states, yes — the entire property typically steps up at the first spouse's death. In common-law states, generally only the deceased spouse's share steps up. Titling matters; get estate planning advice.