The 1921 tax law allowed landlords to exchange leased properties indefinitely without triggering capital gains tax, and even to clear all debts upon their death. Most landlords are largely unaware of this rule.
A retired landlord who bought four apartments ten years ago can exchange them for another building, thus deferring taxes on the profits. If she holds the property until her death, the taxes will be forfeited.
Income LawArticle 1031(The same exchange rule) allows her to defer the receipt of taxes, whileArticle 1014By resetting the cost basis of the inherited property to its market value on the day of her death, her heirs are exempt from paying this deferred profit tax.
Costs of traditional sales for long-term landlords
The landlord purchased the property for $400,000, depreciated it by $250,000, and received a property worth $1.4 million. Let's assume her other income puts all profits into the highest federal tax bracket.
Depreciation lowers the base cost, so her adjusted base is $150,000, and her taxable income is $1,250,000. The federal tax bill is as follows:
| Profits | tax rate | Federal Taxes |
|---|---|---|
| Unrecovered depreciation (Article 1250 revenue): $250,000 | Up to 25% | $62,500 |
| Remaining long-term returns: $1,000,000 | 20% | $200,000 |
| Tax on net investment gains of $1.25 million | 3.8% | $47,500 |
| total | $310,000 |
Most states also levy additional taxes on top of this.
Article 1031: How to defer tax payments to the future
Section 1031 allows you to defer income when you exchange real estate used for business or investment for other real estate of the same kind. Since the Tax Cuts and Jobs Act, this rule applies only to immovable property. U.S. real estate is generally considered to be of the same category and can be exchanged.
Currently, most exchanges are deferred exchanges: selling first and then buying. These transactions are subject to strict regulations:
- A qualified intermediary must retain the sales proceeds. If the seller withdraws cash, the exchange will fail.
- From the date of sale, you have 45 days to provide a written recommendation for a replacement property.
- You have 180 days from the date of sale to complete the transaction.
- To defer all proceeds, one must purchase property of at least equal value and replace the mortgage debt. Any cash retained, known as "cash in," is taxable.
A residential property is ineligible. Her $150,000 base will be transferred to an alternative property. She can consolidate multiple swaps, continuously increasing deferred income, a practice investors call "swap-to-the-blow."
Article 1014 How to eliminate decades of deferred income upon death
Section 1014 provides an heir with the fair market value of the property on the day of death as the basis for inheritance. For example, a property she traded for $1.4 million might have appreciated to $2 million by the time of her death. Her children would then inherit based on a $2 million base.
If the transaction is completed at this price, no federal capital gains tax will be payable. The $1.85 million difference between her base value and her death value will not be taxed, including existing depreciation. Her children can also recalculate depreciation from the new high base.
Property taxes are governed by separate regulations. The federal exemption for 2026 is $15 million per person and $30 million for married couples; the vast majority of landlord households will not be subject to property taxes. For most homeowners, transfer documents are far more important than property taxes.
Rising home prices further amplified this opportunity. According to the S&P CoreLogic Case-Shiller National Home Price Index, it reached 337.3 in July 2026, an increase of 831 TP3T from October 2016.
Who is using this rule, and which states are opposing it?
This is a common and legitimate tax planning practice. It is generally applicable to small landlords and developers. Although there have been frequent proposals to abolish this rule, the One Perfect Act has not changed the terms of similar exchanges.
However, different states have different attitudes. California, for example, requires landlords to file Form FTB 3840 annually when exchanging California properties for out-of-state properties, so that taxes can be levied when the replacement property is eventually sold.
Three ways to deal with landlords over 60 years old
- Numerical calculations were performed before the listing.If you intend to hold the shares until death, exchanging them is usually a better option. If you need to liquidate them quickly, exchanging them may only delay paying taxes.
- Consider a Delaware statutory trust.For a portion of the shares in a professionally managed building, which is considered a similar substitute property, you can retain the deferral and be exempt from landlord responsibilities.
- Maintain written records.Preserve the original transaction statement, depreciation schedule, and Form 8824 requesting the exchange. Inform the heirs to obtain the valuation report at the time of death to prove the underlying adjustments.
The most common problem is missing the 45-day identification deadline, which will result in full tax liability for that year. For amounts involving six figures, it is recommended to calculate the amount with a CPA or trusted advisor before signing the sales contract.
For inquiries, please contact us.[email protected].
common problems
What are Articles 1031 and 1014?
Section 1031 allows landlords to defer capital gains tax when exchanging properties, while Section 1014 exempts inherited property from taxation upon the landlord's death by resetting the underlying cost of the property.
How can landlords use these rules for tax planning?
Landlords can defer capital gains taxes by frequently exchanging properties and transfer the market value of the property to their heirs upon their death.
What happens if the identification deadline is missed?
Missing the 45-day identification deadline will result in all proceeds being taxable in that year, potentially leading to substantial tax liabilities.
Do all states support this type of exchange?
Not all states support similar exchanges. States like California have additional reporting requirements for exchanges to ensure that state taxes can be collected.
