Why No Other Tax Strategy is as Potentially Beneficial as a 1031 Exchange

When it comes to building and preserving generational wealth through real estate, no strategy offers the long-term tax advantages of combining a 1031 exchange with the step-up in cost basis at death. These two provisions of the U.S. tax code, when used together, create a powerful and legal method of deferring—and ultimately avoiding—capital gains taxes on real estate investments.

A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of one investment property into another “like-kind” property. This deferment can continue indefinitely as long as the investor continues to reinvest in qualifying properties. Each time the property is exchanged, the capital gains tax is deferred—not eliminated—but this is where the second component of the strategy comes into play.

The step-up in cost basis at death is a provision that adjusts the tax basis of an asset to its fair market value on the date of the owner’s death. In the context of real estate, this means that heirs inherit the property at its current market value rather than the original purchase price. As a result, the accumulated capital gains tax liability effectively disappears. The combination of these two strategies allows a real estate investor to defer taxes throughout their lifetime and then pass assets to heirs completely free of capital gains taxes.

Consider an investor who purchases a rental property for $500,000. Over the years, they execute multiple 1031 exchanges, trading up into larger and more profitable properties, eventually owning a $3 million asset. Under normal circumstances, selling this property outright would trigger capital gains taxes on the $2.5 million gain. However, by continuing to exchange rather than sell, the investor defers this tax bill year after year. Upon their death, the heirs receive the property with a stepped-up basis of $3 million, and if they sell immediately, they owe no capital gains taxes.

No other tax strategy offers this kind of compounding benefit. Retirement accounts such as IRAs and 401(k)s offer tax deferral, but withdrawals are taxed as ordinary income. Trusts can offer estate planning advantages, but they do not eliminate capital gains unless combined with a stepped-up basis. Installment sales can spread tax liability over time, but not eliminate it. Only the 1031 exchange, paired with the step-up in basis, enables real estate investors to completely bypass capital gains taxation across generations.

Critics may argue that these provisions are loopholes benefiting the wealthy, but the truth is they are accessible to any savvy investor. Moreover, these tools incentivize long-term investment, stable property management, and wealth-building that spans generations.  Besides, no tax benefit that requires you to die can fairly be called a “loophole”.

In conclusion, while many tax strategies offer partial benefits—deferral, reduction, or estate planning flexibility—none offer the trifecta of deferral, growth, and eventual tax elimination like the 1031 exchange coupled with the step-up in cost basis. It is, unequivocally, the most powerful tax strategy available to real estate investors today.

This information is for educational purposes only and does not constitute direct investment advice or a direct offer to buy or sell an investment, and is not to be interpreted as tax or legal advice. The views of this material are those solely of the author and do not necessarily represent the views of affiliates. Statistical data contained in this material was obtained from third-party sources believed to be reliable; however, 1031 Capital Solutions, CIS, CAM, and CIA do not guarantee the accuracy of the information. 

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.