Estate Planning With Real Estate

Most estate planning with real estate comes down to two ideas working together. First, defer the tax while you're alive — through 1031 exchanges — so your equity keeps compounding instead of leaking to the IRS at every sale. Second, hold until death, when your heirs receive a "step-up in basis" that resets the property's value and erases the entire deferred gain. The strategy has a blunt nickname: swap till you drop. But the vehicle you're holding at death — a building, a DST, REIT units — quietly decides how easy, or how painful, the inheritance will be.

This guide brings together the full toolkit covered across our series — the 1031 exchange, DSTs, the 721 UPREIT, and Opportunity Zones — and looks at each through the single lens of what you leave behind.

01 · Why Real Estate Is Built for Estate Planning

Two features of the tax code make real estate uniquely suited to passing wealth. The first is open-ended deferral: Section 1031 lets you roll gains from one property into the next, indefinitely, without ever triggering tax. The second is the step-up in basis at death. Together they create a powerful sequence — defer for decades, then reset the clock entirely for the next generation. No other major asset class lets you compound pre-tax for a lifetime and then hand it over with the embedded tax forgiven.

02 · The Step-Up in Basis: The Linchpin

When you die, the cost basis of your assets is "stepped up" to their fair-market value on that date. For a property you bought at $800,000, depreciated, and that's now worth $3 million, your heirs' basis becomes $3 million — so if they sold the next day, they'd owe essentially nothing. The deferred capital gain and the depreciation recapture you carried for years simply vanish. (In community-property states, a married couple's property can receive a double step-up on the first death.) See what the step-up is worth:

03 · "Swap Till You Drop": 1031 to the Finish Line

The 1031 exchange is the engine that carries you to that step-up. Each exchange defers the gain and rolls it into the next property; the deferred tax never comes due as long as you keep exchanging and never sell for cash. Hold your final position until death, and the step-up erases every dollar of gain you deferred along the way. This is why advisors describe a lifetime of 1031s as "swap till you drop" — the exchanges defer, and death forgives. The one discipline it requires: don't break the chain by cashing out late in life, which would trigger all the deferred tax at once.

The 1031 exchange defers the tax. Death forgives it. Everything in between is just choosing what your heirs find easiest to receive.

— Jerry Baker

04 · The 2026 Estate Tax Picture

There are two different taxes at play, and it's easy to confuse them. The income tax on your gain is what the step-up addresses. The estate tax is separate — a tax on the value you transfer at death. For 2026, the federal estate and gift tax exemption is $15 million per person, or $30 million for a married couple, made permanent and indexed for inflation under the 2025 law. The practical upshot: the vast majority of estates owe no federal estate tax at all, and they still receive the income-tax step-up. If your estate approaches the exemption, lifetime gifting and trusts come into play — but note the trade-off: gifting an appreciated property gives the recipient your old basis (carryover), not a step-up, so for highly appreciated real estate, holding until death is usually better for income taxes even as gifting can help with estate taxes.

05 · The Heirs' Problem: You Can't Split a Building

Here's the issue families run into. A single building is indivisible. Leave one property to several heirs and they're forced into joint ownership — every decision (refinance, repair, sell, set the rent) now requires agreement among people who may want very different things. The common outcomes are conflict, a forced sale on someone else's timeline, or one heir buying out the others. Fractional, divisible interests — DST beneficial interests, OP units, REIT shares — sidestep all of it: each heir gets their own slice to keep or sell independently. See the difference:

06 · DSTs for Estate Planning

A Delaware Statutory Trust is one of the cleanest ways to pre-solve the heirs' problem. Because you own fractional beneficial interests, your stake is already divisible — you can leave specific percentages to specific heirs, and each receives their share with a stepped-up basis. It's also fully passive, so no heir is conscripted into becoming a landlord. And uniquely among the conversions here, DST heirs keep the 1031 option alive: at the trust's full-cycle sale, each heir can independently take cash, exchange into another DST, or roll into a REIT. One heir can cash out while another keeps deferring — no one is forced onto the same path. (See the full DST guide.)

07 · 721 UPREITs for Estate Planning

The 721 exchange takes divisibility one step further by trading real estate for operating-partnership units in a REIT. For heirs, this can be the simplest inheritance of all: the units are easy to divide, they receive a step-up at death, and they offer a path to liquidity — heirs can convert to REIT shares and sell, piecemeal, on their own schedules. If your heirs would rather have easy-to-split, sellable assets than a building to manage or a trust to monitor, a 721 is often the answer. The trade-off, covered in our 721 guide, is that it's a one-way move — once in OP units, neither you nor your heirs can 1031 again — and converting units to shares during life is taxable (though the step-up still resets it all at death).

08 · Opportunity Zones & Estate Planning

Opportunity Zones are powerful for growth, but they behave differently at death — and this is the most important caveat in the guide. Death is not an event that accelerates the OZ tax; your heir steps into your shoes. But the original deferred gain does not receive a step-up. Instead it becomes "income in respect of a decedent" (IRD): your heirs still owe the tax on the gain you originally deferred, recognized on the program's schedule. What can pass favorably is the post-investment appreciation — heirs can continue toward the ten-year exclusion that wipes out tax on the growth. So the rule of thumb for estate planning: a 1031 property, DST, or 721 gives heirs a full step-up that erases the deferred gain; an Opportunity Zone gives them tax-advantaged appreciation but leaves the original deferred gain on the table. Use OZs for the growth, not for the step-up. (See the Opportunity Zones guide.)

09 · Matching Strategy to Your Estate Goal

The right vehicle depends on what you most want for your heirs — to keep building real estate, to divide cleanly without conflict, or to have liquidity. Answer four questions:

10 · Making It Easier on Heirs

Beyond the structures, a few moves dramatically reduce stress and conflict for the people you leave behind:

• Make the asset divisible before you die. Converting a building into DST interests or OP units means heirs inherit clean, separable shares — not a forced partnership.
• Let different heirs take different paths. Divisible interests let one cash out, one keep deferring, and one hold for income — without anyone vetoing anyone else.
• Use a revocable living trust to hold the real estate, so it passes outside probate — faster, private, and less contentious than a will alone.
• Relieve heirs of management. Passive structures mean no heir has to learn to be a landlord overnight or argue about who does.
• Talk to your heirs now. The cheapest conflict-reducer there is. Explain the plan and why, so no one is surprised or suspicious later.
• Coordinate the team. Your estate attorney, CPA, and financial advisor should design this together — the income-tax, estate-tax, and structuring pieces interlock.

11 · Estate-Planning Readiness

Run a quick check on whether your real-estate estate plan is in shape: