--- title: Protecting Your Assets – And Heirs – With The Cost Step-Up In Basis description: A 1031 exchange has the ability to help you build equity in your portfolio, and it can help your heirs realize the full value of your real estate assets. image: https://www.realized1031.com/hubfs/Images/photo/abstract/happyface-block-optimized-is1029895804.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Protecting Your Assets – And Heirs – With The Cost Step-Up In Basis Posted Mar 26, 2019 ![Happy Face With The Cost Step Up In Basis](https://www.realized1031.com/hs-fs/hubfs/Images/photo/abstract/happyface-block-optimized-is1029895804.jpg?width=650&name=happyface-block-optimized-is1029895804.jpg) Investing in real estate for wealth management and estate planning could potentially be a savvy move. If you make intelligent decisions concerning your real estate purchase, you could end up with a decent income flow. And, by the time you die, your heirs might not be penalized with extra taxes on your real estate investments, thanks to a concept known as “[step-up in basis](https://www.realized1031.com/glossary/step-up-in-basis).”   ### Read My Lips: No New Taxes It’s possible that real estate you acquire for income purposes will appreciate in value from the time you buy it until the time you pass it on to your beneficiaries. Meanwhile, when that real estate asset is passed down to your heirs, the step-up in basis adjusts the asset’s value for tax purposes. What it means for your heirs is that they might not incur [capital gain taxes](https://www.realized1031.com/glossary/capital-gain-tax) if they decide to sell the real estate after your death. Let’s say you acquire a duplex. The [cost basis](https://www.realized1031.com/glossary/basis) – i.e., what you pay for the duplex – is $150,000. You own that duplex for years and derive a nice income from it. When you are no longer around, your heirs inherit the duplex, which is now valued at $650,000, according to your local property taxing authority. That $650,000 is now your new cost basis. But before your heirs panic about owing the IRS on the $500,000 gain (the appreciated amount), they need to know that the step-up in basis could mean that the appreciation might not be subject to capital gain income taxes. If your heirs decide to sell that duplex for $650,000, they might not be on the hook to the IRS for the capital gain tax. Depending on the estate, however, there may be additional taxes or other considerations, such as an Alternative Minimum Tax. At Realized, we are not tax professionals nor provide tax advice, so consult a CPA or other tax professional if this is something that may concern you. Or, perhaps your heirs want to hang on to that duplex for another few years. That works to their advantage, as well. If they sell the property after a five-year hold at $1,000,000, the step-up in cost basis means they would owe capital gain taxes only on the $350,000 gain ($1,000,000 - $650,000 = $350,000). Your heirs could actually defer the capital gains taxes if the duplex is relinquished through a [1031 exchange](https://www.realized1031.com/glossary/1031-exchange). The exchange may both help you build equity in your portfolio, while assisting your [beneficiaries](https://www.realized1031.com/glossary/beneficiary) in deferring that capital gain tax Note, that there is the possibility that your heirs may inherit the property at a cost that is less than its original cost basis. Instead of being able to capture the reduction in capital gains taxes, however, your heirs would be unable to capture the capital gains loss that would’ve incurred if the sell of the property happened before death. And in the situation that the value declines during the few years that heirs hold the property, the heirs may actually be able to realize a capital loss upon sale. Just like any real estate investment, there is the possibility of loss, with the silver lining being able to offset capital gains. For example, if the property were to sell for $400,000, the heirs may be eligible to offset other capital gains using the $250,000 loss from its inherited cost step-up in basis. And remember that short-term losses can only offset short term gains, and that long-term losses may only offset long-term gains.   ### The 1031 Wealth-Building Tool Let’s go back to your duplex. Perhaps, instead of hanging on to it long-term, you want a change; you want to move from owning a residential property to owning a medical office building. You can exchange your duplex, valued at $650,000 for a medical office building (a “like-kind” asset), as long as the replacement asset is of greater or equal value to the property you are relinquishing (and you meet the mandated [time frames set forth by the IRS](https://www.realized1031.com/blog/1031-exchange-rules-explained)). With that exchange, you can defer any capital gain tax. Now. Let’s say that, following another five-year hold, you’re tired of hands-on management, and you have your eye on a [Delaware Statutory Trust (DST)](https://www.realized1031.com/glossary/delaware-statutory-trust-dst). Your medical office building is now valued at $1,000,000. Once you’ve tagged the perfect replacement property, exchange your medical office building for that DST and, once again, you can defer any capital gain taxes. As the value of your asset continues to increase, you can keep exchanging into other, more valuable, real estate – and might not have to pay a dime of capital gain tax until you sell and do not re-invest your proceeds. When you die, and the real estate is passed on to your heirs, the step-up in basis can pretty much wipe out any taxes that have been deferred through your exchanges. If they decide to sell that real estate for the valued amount, they might not owe the IRS for taxes, either. The strategy is known as “swap until you drop” and it can protect your heirs from penalizing the wealth you are leaving them. So, don’t overlook the power of a 1031 exchange. In addition to having the ability to help you build equity in your portfolio, it can help your heirs realize the full value of your real estate assets when you are no longer around. Learn Ways To Help Build Long-Term Real Estate Wealth [![Get Tips For Managing Real Estate Wealth](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-eBook-250c.jpg?width=250&height=250&name=IPWM-eBook-250c.jpg "Learn new ways to use real ...") ](https://www.realized1031.com/blog/protecting-your-assets-and-heirs-with-the-cost-step-up-in-basis#blogform) Download eBook ---   --- ### Get Tips For Managing Real Estate Wealth ![Learn Ways To Help Build Long-Term Real Estate Wealth](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/IPWM-eBook-550.jpg?width=550&height=650&name=IPWM-eBook-550.jpg) Learn new ways to use real estate to pursue your wealth goals. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. Search ### [Why Realized](https://www.realized1031.com/why-realized) - [Wealth Management](https://www.realized1031.com/the-wealth-management-gap) - [Why Realized](https://www.realized1031.com/why-realized) - [Our Process](https://www.realized1031.com/how-realized-works) - [Scenarios](https://www.realized1031.com/scenarios) - [Private Client Program](https://www.realized1031.com/private-client) - [Realized Exchange Services](https://www.realized1031.com/realized-exchange-services) ### [The Company](https://www.realized1031.com/about-us) - [The Team](https://www.realized1031.com/about-us) - [FAQ](https://www.realized1031.com/frequently-asked-questions) - [Testimonials](https://www.realized1031.com/testimonials) - [Press](https://www.realized1031.com/press) - [Careers](https://www.realized1031.com/careers) ### [Partners](https://www.realized1031.com/partners) - [Financial Advisors](https://www.realized1031.com/advisor) - [Broker Dealers](https://www.realized1031.com/partners/broker-dealers) - [Real Estate Agents](https://www.realized1031.com/partners/real-estate-agents) - [Certified Public Accountants](https://www.realized1031.com/partners/certified-public-accountants) ### [Resources](https://www.realized1031.com/resources) - #### Learn - [Articles](https://www.realized1031.com/blog) - [Glossary of Terms](https://www.realized1031.com/glossary) - [Capital Gains Tax Rates](https://www.realized1031.com/capital-gains-tax-rate) - #### Watch - [Video Library](https://www.realized1031.com/videos) - [Webinar Archive](https://www.realized1031.com/webinars) - #### Read - [Delaware Statutory Trust](https://www.realized1031.com/delaware-statutory-trust) - [Tenants-In-Common](https://www.realized1031.com/tenants-in-common-tic) - [1031 Exchange](https://www.realized1031.com/1031-exchange) - [Qualified Intermediary](https://www.realized1031.com/qualified-intermediary) - [Qualified Opportunity Zones](https://www.realized1031.com/opportunity-zones) #### Realized - 500 W 13th Street Austin, TX 78701 - (877) 797-1031 ##### [Contact Us](https://www.realized1031.com/contact-us) - [![Realized on Facebook](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-facebook-whiterev.png?width=60&height=60&name=social-facebook-whiterev.png)](https://www.facebook.com/Realized/) - [![Realized on LinkedIn](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-linkedin-whiterev.png?width=60&height=60&name=social-linkedin-whiterev.png)](https://www.linkedin.com/company/realized/) - [![Realized on YouTube](https://www.realized1031.com/hs-fs/hubfs/Images/UI/Social/Icons/Mix/social-youtube-whiterev.png?width=60&height=60&name=social-youtube-whiterev.png)](https://www.youtube.com/c/Realized1031?sub_confirmation=1) - [![Realized Holdings, Inc. BBB Business Review](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/bbb/RZH2-bbb-seal.png?width=40&height=65&name=RZH2-bbb-seal.png)](http://www.bbb.org/central-texas/business-reviews/real-estate-investors/realized-holdings-llc-in-austin-tx-1000112948/#bbbonlineclick) - [![FEA Logo](https://www.realized1031.com/hs-fs/hubfs/Images/professional-assoc/fea/RZH2-fea-logo.png?width=82&height=65&name=RZH2-fea-logo.png "FEA Logo")](https://www.1031.org) SECURITIES DISCLOSURE Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized Holdings”). Securities and/or Investment Advisory Services may be offered through Registered Representatives or Investment Advisor Representatives of Realized Financial, Inc. ("Realized"), a broker/dealer, member [FINRA](https://www.finra.org)/[SIPC](https://www.sipc.org/), and registered investment adviser. Realized is a subsidiary of Realized Holdings, Inc. ("Realized Holdings"). Check the background of this firm on [FINRA's BrokerCheck](https://brokercheck.finra.org/firm/summary/22333). Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested. This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "Investing in real estate for wealth management and estate planning could potentially be a savvy move. If you make intelligent decisions concerning your real estate purchase, you could end up with a decent income flow. And, by the time you die, your heirs might not be penalized with extra taxes on your real estate investments, thanks to a concept known as “step-up in basis.” Read My Lips: No New Taxes It’s possible that real estate you acquire for income purposes will appreciate in value from the time you buy it until the time you pass it on to your beneficiaries. Meanwhile, when that real estate asset is passed down to your heirs, the step-up in basis adjusts the asset’s value for tax purposes. What it means for your heirs is that they might not incur capital gain taxes if they decide to sell the real estate after your death. Let’s say you acquire a duplex. The cost basis – i.e., what you pay for the duplex – is $150,000. You own that duplex for years and derive a nice income from it. When you are no longer around, your heirs inherit the duplex, which is now valued at $650,000, according to your local property taxing authority. That $650,000 is now your new cost basis. But before your heirs panic about owing the IRS on the $500,000 gain (the appreciated amount), they need to know that the step-up in basis could mean that the appreciation might not be subject to capital gain income taxes. If your heirs decide to sell that duplex for $650,000, they might not be on the hook to the IRS for the capital gain tax. Depending on the estate, however, there may be additional taxes or other considerations, such as an Alternative Minimum Tax. At Realized, we are not tax professionals nor provide tax advice, so consult a CPA or other tax professional if this is something that may concern you. Or, perhaps your heirs want to hang on to that duplex for another few years. That works to their advantage, as well. If they sell the property after a five-year hold at $1,000,000, the step-up in cost basis means they would owe capital gain taxes only on the $350,000 gain ($1,000,000 - $650,000 = $350,000). Your heirs could actually defer the capital gains taxes if the duplex is relinquished through a 1031 exchange. The exchange may both help you build equity in your portfolio, while assisting your beneficiaries in deferring that capital gain tax Note, that there is the possibility that your heirs may inherit the property at a cost that is less than its original cost basis. Instead of being able to capture the reduction in capital gains taxes, however, your heirs would be unable to capture the capital gains loss that would’ve incurred if the sell of the property happened before death. And in the situation that the value declines during the few years that heirs hold the property, the heirs may actually be able to realize a capital loss upon sale. Just like any real estate investment, there is the possibility of loss, with the silver lining being able to offset capital gains. For example, if the property were to sell for $400,000, the heirs may be eligible to offset other capital gains using the $250,000 loss from its inherited cost step-up in basis. And remember that short-term losses can only offset short term gains, and that long-term losses may only offset long-term gains. The 1031 Wealth-Building Tool Let’s go back to your duplex. Perhaps, instead of hanging on to it long-term, you want a change; you want to move from owning a residential property to owning a medical office building. You can exchange your duplex, valued at $650,000 for a medical office building (a “like-kind” asset), as long as the replacement asset is of greater or equal value to the property you are relinquishing (and you meet the mandated time frames set forth by the IRS). With that exchange, you can defer any capital gain tax. Now. Let’s say that, following another five-year hold, you’re tired of hands-on management, and you have your eye on a Delaware Statutory Trust (DST). Your medical office building is now valued at $1,000,000. Once you’ve tagged the perfect replacement property, exchange your medical office building for that DST and, once again, you can defer any capital gain taxes. As the value of your asset continues to increase, you can keep exchanging into other, more valuable, real estate – and might not have to pay a dime of capital gain tax until you sell and do not re-invest your proceeds. When you die, and the real estate is passed on to your heirs, the step-up in basis can pretty much wipe out any taxes that have been deferred through your exchanges. If they decide to sell that real estate for the valued amount, they might not owe the IRS for taxes, either. The strategy is known as “swap until you drop” and it can protect your heirs from penalizing the wealth you are leaving them. So, don’t overlook the power of a 1031 exchange. In addition to having the ability to help you build equity in your portfolio, it can help your heirs realize the full value of your real estate assets when you are no longer around.", "articleSection" : [ "Financial Planning" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2020-12-02T21:41:55+0000", "datePublished" : "2020-12-02T21:41:55+0000", "description" : "A 1031 exchange has the ability to help you build equity in your portfolio, and it can help your heirs realize the full value of your real estate assets.", "headline" : "Protecting Your Assets – And Heirs – With The Cost Step-Up In Basis", "image" : { "@type" : "ImageObject", "height" : 434, "url" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/happyface-block-optimized-is1029895804.jpg", "width" : 650 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/protecting-your-assets-and-heirs-with-the-cost-step-up-in-basis", "name" : "Protecting Your Assets – And Heirs – With The Cost Step-Up In Basis", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://cdn2.hubspot.net/hubfs/733513/Images/photo/abstract/happyface-block-optimized-is1029895804.jpg" } ```