Selling an Inherited or Jointly-Owned Property With a 1031

Don't Reach for a 1031 Before You Understand the Step-Up When people inherit real estate and start thinking about selling, the instinct is often to ask, "How do I avoid the capital gains tax? Should I do a 1031 exchange?" But for inherited property, that question can be premature. The most important fact about inherited real estate is that it usually arrives with a **step-up in basis** at the date of death, which can shrink or eliminate the taxable gain on a near-term sale. So before you structure an exchange, you need to figure out whether you even have meaningful gain to defer. For some heirs, the answer is no, and a 1031 would add complexity for little benefit. For others, especially co-owners with different goals or those who've held the property for years, a 1031 or a DST can be exactly the right tool.

Inherited Property Already Gets a Step-Up Here's the nuance many people miss: when you inherit real estate, its basis is generally **stepped up to fair market value as of the date of death** (or an alternate valuation date the estate may elect). Your taxable gain on a later sale is measured from that stepped-up value, not from what the deceased originally paid. The practical consequences:

• ›Sell soon after inheriting, and your gain is measured from a value close to the sale price, so there may be little or no capital gain to tax.
• ›In that case, a 1031 exchange may be unnecessary, because there's simply not much gain to defer in the first place. You could sell, take the cash, and owe little.

This is the opposite of the situation a lifelong owner faces, where decades of deferred gain and depreciation create a large built-in tax. The heir often starts with a relatively clean slate.

When a 1031 Still Helps The step-up resets basis **at death**, but any appreciation **afterward** is still taxable. The longer you hold inherited property, the more this matters:

• ›If you inherited a property worth $600,000 and it's now worth $900,000 years later, the $300,000 of post-inheritance appreciation is real, taxable gain on a sale.
• ›A 1031 exchange can defer that post-inheritance gain just as it would for any other investment property.
• ›There may also be depreciation recapture if you've been renting the inherited property and claiming depreciation since you inherited it.

So the decision hinges on timing and appreciation: little gain since death usually means a 1031 isn't needed; substantial gain since death is exactly where a 1031 earns its keep. These figures are illustrative only.

A Worked Illustrative Example Consider two heirs of identical $500,000 properties:

• ›Heir A sells three months after inheriting, when the property is still worth about $500,000. Gain measured from the $500,000 stepped-up basis is roughly zero. No 1031 needed; a simple sale is clean.
• ›Heir B holds and rents the property for eight years. It appreciates to $750,000 and she's claimed depreciation along the way. A sale would trigger tax on roughly $250,000 of appreciation plus recapture. A 1031 exchange into a new rental or a DST could defer that. These numbers are illustrative.

Jointly-Owned and Co-Owner Situations Inherited property often comes with multiple owners, and siblings rarely want the same thing. One wants cash now, another wants to keep investing, a third wants hands-off income without being a landlord. Because a 1031 exchange is generally done at the level of **each owner's interest**, co-owners may be able to go separate ways:

• ›The one who wants cash can sell their share and pay any tax (which may be small thanks to the step-up).
• ›The one who wants to keep investing can exchange their share into another property.
• ›The one who wants passive income can exchange into DST interests.

Structuring this correctly is technical, depends heavily on how the property is titled, and is best planned before listing, not after an offer is on the table.

DSTs for Divided Interests When co-owners want to stay invested but no longer want to be partners with each other, fractional DST interests can be a clean landing spot. Each owner can exchange their share into DST interests sized to their own goals and risk tolerance, without being tied to the others' decisions. This neatly resolves the classic inheritance standoff where siblings are stuck co-managing a building none of them fully controls. DSTs are securities for accredited investors and carry risk, including loss of principal, illiquidity, and no guaranteed returns. They aren't right for everyone, and crucially, **how ownership is titled before the sale can determine whether each party can exchange independently.**

Titling, Timing, and the Partnership Trap How the property is held matters enormously, and one structure in particular causes trouble: if the property is owned by a **partnership or certain entities**, the partnership, not the individual partners, generally owns the asset for 1031 purposes. That can prevent individual co-owners from each going their own way, because a partnership interest itself is not like-kind property eligible for a 1031. Untangling this, sometimes called a "drop and swap," is technical, sensitive to timing, and must be handled carefully and well in advance. Key points:

• ›Decisions made before listing about titling, partnership interests, and timing determine your options later.
• ›These choices are hard or impossible to unwind once a sale is underway.
• ›Plan the structure before you go to market, not after an offer arrives.

Deadlines Still Apply For any owner who does choose a 1031, the standard rules govern: **45 days to identify** replacement property and **180 days to close**, with the QI holding proceeds and no extensions for indecision among co-owners. Coordinating multiple heirs under one clock is a real challenge, which is another reason a pre-packaged DST that closes fast is often used, and can serve as a backup if a primary replacement deal falls through.

Estate-Within-an-Estate Considerations There's a recursive wrinkle worth noting. If an heir holds inherited property, exchanges it via 1031, and continues holding the replacement until their own death, **their** heirs may in turn receive a fresh step-up. In other words, the step-up an heir received doesn't end the planning; it can be the start of the next generation's "swap till you drop" strategy. Coordinating this with wills, trusts, and estate tax planning keeps the benefit intact across generations.

Bring in Your Advisors Early and Take the Next Step This is educational information, not tax, legal, or estate advice. Inherited and jointly-owned property blends step-up basis, co-ownership, partnership rules, and 1031 mechanics in ways that are easy to get wrong and costly to fix after the fact. Your next steps: have your CPA confirm your **actual** gain after the step-up, ask your attorney to review titling and any partnership structure well before listing, and work with your estate planner to decide whether a simple sale, a 1031 exchange, or a DST best fits each owner's goals.