The Step-Up in Basis — Why 'Swap Till You Drop' Actually Works
Dwaine Clarke · NNN Deal Finder / GCT Commercial
Published July 16, 2026
Every 1031 exchange defers tax; the step-up in basis is what can eventually delete it. Understanding this rule is understanding why net lease portfolios are built to be inherited, not sold.
The rule in one paragraph
When you die holding appreciated property, your heirs’ basis resets to fair market value at death. The gain that accumulated during your lifetime — including every dollar deferred through exchanges, and all depreciation taken — is never recognized by anyone. An heir selling at the date-of-death value owes essentially nothing; an heir holding starts a brand-new depreciation schedule on a high basis.
Why it pairs so naturally with net lease
The strategy called “swap till you drop”: exchange appreciated, management-heavy assets into passive NNN properties as you age, defer gains at every step, collect corporate-backed income through retirement — and let the step-up resolve the embedded tax at the end. The asset class fits the endgame: leases outlive their owners gracefully, and heirs receive income-producing property with wiped-clean basis rather than a tax problem and a to-do list.
What qualifies — and what doesn’t
The step-up covers assets in your estate: directly held real estate, your share of partnership property (via inside/outside basis mechanics your CPA manages with a §754 election), revocable-trust assets. It does not cover retirement accounts (IRAs are income in respect of a decedent — different, worse rules), gifts made during life (carryover basis — gifting appreciated property to kids forfeits the step-up), or assets in most irrevocable trusts completed years earlier. The classic error: an aging owner gifting the building to children “to simplify things,” converting a free basis reset into a carried-over tax bill.
The policy caveat
The step-up is perennially proposed for limitation — carryover-basis regimes, gain-at-death proposals, exemption caps. Nothing enacted has touched the core rule as of this writing (VERIFY current law at planning time), but estates built entirely on one section of the code should be reviewed whenever Washington gets ambitious. A plan that works under current law and degrades gracefully under change is the standard we’d hold any advisor to.
Estate strategy and acquisition strategy are the same conversation on a long enough timeline — loop your estate counsel in when the replacement-property plan is being built, not after.