Inherited Property and 1031 — Why You May Not Need One

Heirs arrive asking how to exchange the building they inherited — and the first answer is usually happier than expected: thanks to the step-up in basis, there may be little gain to defer at all. The exchange conversation with inherited property is really a sequencing conversation.

The head start you inherited

Basis reset to date-of-death value means selling soon after inheriting recognizes only post-death appreciation — often minimal. Decades of the decedent’s gain and depreciation vanished at the step-up. An heir who wants cash can frequently just sell; an heir who wants different real estate can often sell-and-buy without exchange machinery, because the tax the QI would defer barely exists yet.

When the exchange comes back

Time rebuilds gain. Hold the inherited rental five years through a strong market and the new appreciation (plus your own depreciation) is ordinary exchange material — inherited property is fully 1031-eligible, and intent transfers cleanly when the property keeps operating as an investment. The common pattern we see: heirs hold the family asset while settling affairs, then exchange into passive NNN once managing Dad’s fourplex from another state stops making sense. The exchange defers their chapter of gain; the step-up already handled his.

Coordination notes

Estates mid-administration should sequence carefully: basis documentation (a date-of-death appraisal is cheap insurance), any §754 election where partnerships hold the property, and co-heir alignment before listing — TIC mechanics let heirs exchange separately when goals diverge, but only if title lands that way. And for the surviving spouse in a community-property state, the double step-up makes the “sell now or exchange” math friendlier still. One CPA-plus-broker call before any listing usually settles the whole map.