A 1921 Rule Called Section 1031 Lets Landlords Swap One Building for Another Forever and Never Pay Capital Gains. Then They Die, and the Bill Disappears for Good
A tax rule from 1921 lets landlords swap one rental property for another indefinitely without ever triggering a capital gains bill, and a second rule can erase the entire debt at death. Most landlords have no idea the two work…
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A retired landlord who bought a fourplex decades ago can trade it for another building and defer the tax on her profit. If she holds until death, the tax bill disappears.
Section 1031, the like-kind exchange rule from the Revenue Act of 1921, lets her defer the tax on her gain. Section 1014 resets the cost basis of inherited property to its market value on the date of death, which wipes out the deferred gain for her heirs. Here’s how the two rules work together, in dollars.
What a Straight Sale Costs a Longtime Landlord
She paid $400,000, deducted $250,000 in depreciation, and trades for $1.4 million. Assume her other income places the whole gain in the top federal brackets.
Depreciation lowers basis, so her adjusted basis is $150,000 and her taxable gain is $1.25 million. Here’s the federal bill:
| Slice of Gain | Rate | Federal Tax |
|---|---|---|
| Depreciation taken (unrecaptured Section 1250 gain): $250,000 | 25% max | $62,500 |
| Remaining long-term gain: $1,000,000 | 20% | $200,000 |
| Net investment income tax on full $1,250,000 | 3.8% | $47,500 |
| Total | $310,000 |
Most states charge their own tax on top of that.
How Section 1031 Pushes the Bill Into the Future
Section 1031 lets you defer a gain when you swap real property held for business or investment for other like-kind real property. Since the Tax Cuts and Jobs Act, the rule covers only real estate. U.S. real property generally counts as like-kind to other U.S. real property. An apartment building can become a warehouse, raw land, or a strip mall.
Most swaps today are deferred exchanges: you trades first and buy later. Those come with strict rules:
- A qualified intermediary has to hold the sale proceeds. If the seller takes the cash, the exchange fails.
- You get 45 days from the sale to identify replacement property in writing.
- You get 180 days from the sale to close.
- To defer the whole gain, buy property worth at least as much and replace the mortgage debt. Any cash you keep, called “boot,” is taxed.
Your own home doesn’t qualify. Her $150,000 basis moves into the replacement building. She can repeat the swap as often as she likes, stacking more deferred gain on the same low basis. Investors call it “swap till you drop.”
Why Section 1014 Erases Decades of Deferred Gain at Death
Section 1014 gives an heir a basis equal to the property’s fair market value on the date of death. Say she trades into a $1.4 million building that’s worth $2 million when she dies. Her children inherit it with a $2 million basis.
If they trade for that price, they owe no federal capital gains tax. The $1.85 million gap between her basis and the date-of-death value never gets taxed, including the depreciation she claimed. The children can also start depreciating the building from the new, higher basis.
Estate tax is a separate issue. The 2026 federal exemption is $15 million per person and $30 million for married couples, so most landlord families owe none. The paperwork around the transfer matters far more than the estate tax for most owners (we put the full beneficiary, ownership, and trust checklist in a free estate guide here).
Rising prices strengthen the deal. The S&P CoreLogic Case-Shiller National Home Price Index reached 337.3 in July 2026, up 83% from October 2016.
Who Uses It and Where States Push Back
This is routine, legal tax planning. Small landlords use it as much as developers do. Proposals to repeal it come up regularly, but the One Big Beautiful Bill left like-kind exchanges unchanged.
States don’t all play along. California, for example, requires owners who swap California property for out-of-state property to file Form FTB 3840 every year so it can collect its tax when the replacement is eventually sold.
Three Moves for Landlords Over 60
- Run both numbers before you list. If you plan to hold until death, a swap usually wins. If you’ll need cash soon, a swap may just delay the bill.
- Look at Delaware statutory trusts. These partial stakes in professionally managed buildings count as like-kind replacement property. You keep the deferral and skip landlord duties.
- Keep the paper trail. Save the original closing statement, depreciation schedules, and every Form 8824 filed for an exchange. Tell your heirs to get a date-of-death appraisal to prove the step-up.
The most common failure is a missed 45-day identification deadline, which makes the whole gain taxable that year. With six figures on the line, run the math with a CPA or fiduciary advisor before signing the sale contract.
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
