Estate Planning For Property Owners

An El Paso property owner who has deferred gain through one exchange after another eventually asks the same question: does the deferred tax ever go away, or is it just waiting at the end? The answer depends less on the exchanges themselves than on what happens to the property at death, where a separate part of the tax code, the step-up in basis, changes the math entirely.

When an owner dies holding real estate, their heirs generally inherit it at its fair market value on the date of death, not at the owner's original purchase price or reduced 1031 basis. That reset is called a step-up in basis, and it means decades of deferred capital gains and depreciation recapture, the exact liabilities a 1031 exchange postponed rather than eliminated during the owner's lifetime, can effectively disappear for income tax purposes if the heirs sell shortly after inheriting.

An El Paso investor who has exchanged into progressively larger properties over twenty or thirty years, moving from a single rental into a multifamily building and eventually into an industrial or medical office asset, is carrying a basis far below the property's current value. Selling outright during their lifetime would trigger all of that deferred gain and recapture at once. Continuing to exchange, sometimes called swapping until death, keeps the deferral running, and if the property passes to heirs at death rather than being sold first, the step-up can wipe out the income tax exposure that built up across every prior exchange.

Income tax and estate tax are separate systems, and the step-up in basis doesn't touch estate tax exposure. A property's full fair market value at death is still counted toward the estate for federal estate tax purposes, which only applies above a large exemption threshold that's adjusted periodically. An owner with a sizable El Paso real estate portfolio, particularly one built up through repeated exchanges into larger assets, should have that value reviewed against current exemption levels rather than assuming the step-up handles everything.

None of this changes how a 1031 exchange works during an owner's lifetime, the same 45-day identification and 180-day closing rules, the same qualified intermediary requirement, and the same like-kind property standard apply whether or not step-up is part of the long-term plan. What it does change is the framing: an owner deciding whether to keep exchanging into new property, sell outright and pay the accumulated tax, or hold toward a step-up should generally work through that decision with an estate attorney and CPA together, since the estate tax exposure and the income tax deferral are answered by different parts of the tax code.

• Step-up in basis resets an heir's basis to fair market value at death, addressing income tax, not estate tax
• A 1031 exchange defers income tax during the owner's life; it doesn't by itself reduce estate tax exposure
• Coordinating both usually requires an estate attorney and CPA, not the exchange team alone