Step-up in basis at death — the most underused estate strategy
If you hold appreciated property until death, your heirs receive it at its current fair market value as their basis — eliminating the embedded capital gain entirely. Combined with 1031 exchanges during life, this is the foundation of multi-generational real estate wealth.
The mechanics: you bought a property in 1995 for $300K. By 2026 it's worth $1.2M. If you sell, you pay capital gains on the $900K appreciation. If you die holding it, your heirs' basis is $1.2M — they could sell the next day for $0 in capital gains tax. The federal estate tax may apply at the very high estate tax thresholds, but for most families that's not in play.
This makes "trade up via 1031, hold until death" the canonical real estate wealth-transfer strategy. You compound tax-deferred during your life, then pass the embedded gains to heirs tax-free. The IRS only collects ordinary income tax on rental income along the way — the appreciation and depreciation recapture both disappear at death.
Note: tax law changes. Step-up has periodically been on the chopping block in Congress. The 2017 TCJA preserved it; the OBBB (2025) preserved it. But each new administration could revisit. The current default planning assumption is that it stays in place, but high-net-worth families should monitor.