If you've inherited a rental property and aren't sure what to do, the good news is that inheriting usually puts you in a favorable tax position. Under IRC §1014, you generally receive a step-up in basis to the property's fair market value as of the date of death — which means if you sell soon after inheriting, there may be little or no capital gain, and little tax. Your three core options are: (1) sell while the stepped-up basis keeps the tax low; (2) keep and 1031-exchange into different investment real estate (including a passive DST) to defer any future gain and reshape the holding; or (3) keep and rent it as-is. If you want the income but not the work of being a landlord, a 1031 into a DST lets you trade an inherited rental for fractional, professionally managed real estate. DSTs are securities sold to accredited investors after a suitability review; this is educational information, not tax advice — confirm with your CPA.
The Step-Up in Basis: Your Biggest Advantage
When you inherit property, IRC §1014 generally resets your basis to the fair market value as of the decedent's date of death (a “step-up” when the property had appreciated). This is powerful: the appreciation that occurred during the decedent's lifetime is effectively erased for capital-gains purposes. If you sell shortly after inheriting, your gain is measured only against that stepped-up basis — so there's often little or no taxable gain, and therefore little or no capital-gains tax. We explain the mechanic in the context of exchanges in 1031 exchange and the step-up in basis at death.
Two notes for accuracy. The step-up resets the basis you use going forward, including for depreciation if you keep renting. And the longer you hold after inheriting, the more new appreciation accrues above the stepped-up basis — appreciation that would be taxable if you later sell. So the step-up makes an early sale relatively tax-efficient, and it also sets the starting line for any future gain if you hold. How this applies depends on dates, valuations, and whether the estate elected an alternate valuation date, so confirm with your CPA.
Option 1: Sell Soon and Use the Step-Up
If you don't want to own real estate at all, selling soon after inheriting is often the cleanest path, precisely because the step-up keeps the tax low. You take the proceeds, pay little or no capital-gains tax (on the modest gain, if any, since you inherited), and move on. The trade-off is that you exit real estate entirely — no ongoing income, no future appreciation, and the proceeds are now in cash or wherever you reinvest them. For heirs who simply want liquidity and no further involvement, this is a perfectly rational choice. The step-up is doing the heavy lifting that makes it tax-efficient.
Option 2: Keep and 1031-Exchange Into Something Better
If you want to stay invested in real estate but the inherited property doesn't suit you — it's in the wrong place, it's the wrong type, or you don't want to manage it — a 1031 exchange lets you sell it and reinvest into different like-kind investment real estate while deferring any gain. Because you inherited with a stepped-up basis, the deferred gain is usually small at first; the value of the 1031 grows the longer you've held and appreciated since inheriting. See 1031 exchange on inherited property for the specifics.
The key for an unwilling-landlord heir is that the replacement property can be a passive Delaware Statutory Trust. Confirmed as like-kind real property by IRS Revenue Ruling 2004-86, a DST lets you exchange the inherited rental into fractional, professionally managed real estate — you keep real estate income and defer the gain, but a sponsor handles all the management. You can also consolidate or diversify: one inherited property can become interests in several DSTs across markets and sectors, which can be easier to divide among siblings or future heirs than a single building. DSTs are illiquid, fee-bearing, accredited-only securities; weigh the trade-offs.
Inheriting resets your basis. From that starting line, you can sell with little tax, or keep going — including swapping into a passive DST so you own real estate without being a landlord.
Option 3: Keep and Rent It As-Is
You can also simply keep the property and continue renting it. You'd depreciate it from the stepped-up basis, collect rent, and manage it (or hire a manager). This makes sense if the property is a genuinely good asset, you're comfortable being a landlord, and it fits your portfolio. The honest downside is that you've now chosen active landlording — tenants, repairs, vacancies — and any appreciation above your stepped-up basis becomes a future taxable gain if you sell without exchanging. Many heirs who try this discover they're “accidental landlords” and later move to Option 1 or Option 2.
- Inheriting a rental usually gives you a step-up in basis (IRC §1014) to date-of-death value — so selling soon after often triggers little or no capital-gains tax.
- Option 1 — sell soon: cleanest exit, tax-efficient thanks to the step-up, but you leave real estate entirely.
- Option 2 — keep and 1031: reinvest into different investment real estate, including a passive DST, deferring future gain and reshaping the holding.
- Option 3 — keep and rent: stay a landlord from the stepped-up basis; future appreciation becomes a taxable gain if you later sell without exchanging.
When a DST Fits an Heir Who Doesn't Want to Manage Property
A DST is often the right answer for the specific heir who wants to keep the real estate income but not the job. If you'd like to stay invested (for the income and the deferral) but have no interest in being a landlord, exchanging the inherited rental into DSTs gives you passive, professionally managed real estate. You receive distributions representing your share of the rental income over a defined hold (commonly around five to seven years), with no tenants or repairs to handle. Distributions are projections, not guarantees, and DSTs carry fees and are illiquid — so it suits an heir who qualifies as an accredited investor, can accept the multi-year hold, and values passivity over control. If you'd rather just have cash, Option 1 (sell, using the step-up) is simpler.
How Baker 1031 Helps Heirs
Baker 1031 Investments helps heirs who want to stay invested in real estate without managing it evaluate the keep-and-1031-into-a-DST option. We help you understand whether a 1031 into DSTs fits, evaluate DST offerings (sponsor, properties, fees, debt, and structure; see the Data Center), and, if suitable, identify DSTs within your 45-day window and close within 180 days, coordinating with your qualified intermediary. We work alongside your CPA, who leads on the step-up, basis, and timing analysis that drives whether selling or exchanging is better for you.
DST interests are securities offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), to accredited investors after a suitability review. Baker 1031 does not provide tax or legal advice; your CPA and attorney confirm the step-up, your 1031 eligibility, the deferral, and the timing. Distributions and returns are never guaranteed, DSTs are illiquid, and past performance does not guarantee future results. To explore your options, request access or contact our team.
Frequently Asked Questions
What are my tax options after inheriting a rental property?
You have three core options. First, sell soon: because you generally receive a step-up in basis to the property's fair market value as of the date of death under IRC §1014, selling shortly after inheriting usually triggers little or no capital-gains tax, making it a clean, tax-efficient exit if you don't want to own real estate. Second, keep and 1031-exchange: if you want to stay in real estate but the property doesn't suit you, you can sell it and reinvest into different like-kind investment real estate — including a passive Delaware Statutory Trust — deferring any future gain. Third, keep and rent: continue owning and renting from the stepped-up basis, accepting the work of being a landlord. The right choice depends on whether you want liquidity, passive real estate income, or to be an active landlord, and on the property's value and location. Because the step-up, basis, and timing interact with your situation, confirm the details with your CPA, since Baker 1031 does not provide tax advice.
How does the step-up in basis work on an inherited rental?
Under IRC §1014, when you inherit property you generally receive a step-up in basis to the property's fair market value as of the decedent's date of death (assuming the property had appreciated). This effectively erases, for capital-gains purposes, the appreciation that occurred during the decedent's lifetime. The practical effect is significant: if you sell the inherited rental soon after inheriting, your gain is measured only against the stepped-up basis, so there is often little or no taxable gain and little or no capital-gains tax. If you keep the property, the stepped-up basis becomes your new starting point for depreciation and for any future gain — meaning appreciation that accrues after you inherit would be taxable if you later sell without a 1031 exchange. Some estates elect an alternate valuation date, which can change the figure. Because the step-up depends on dates, valuations, and estate elections specific to your situation, confirm exactly how it applies with your CPA before deciding to sell, exchange, or hold.
Can I do a 1031 exchange on an inherited rental property?
Yes, in most cases — an inherited property that you hold for investment can generally be exchanged into other like-kind investment real estate under IRC §1031, including into a Delaware Statutory Trust. The interesting interaction is with the step-up: because you inherited with a basis stepped up to date-of-death value, your taxable gain is usually small right after inheriting, so an immediate sale is already fairly tax-efficient. The 1031 becomes more valuable the longer you hold and the more the property appreciates above your stepped-up basis, because then you have a real gain to defer. A 1031 also lets you reshape the holding — consolidate, diversify, or move from active landlording into a passive DST — while deferring that gain. To qualify, you must hold the property for investment, engage a qualified intermediary before selling, identify replacement property within 45 days, and close within 180 days. Whether selling or exchanging is better for you depends on your basis, the gain, and your goals, so confirm the specifics with your CPA.
When does a DST make sense for an heir?
A DST tends to fit the heir who wants to keep real estate income but not the work of being a landlord. If you'd like to stay invested — for the income and to defer any gain — but have no interest in screening tenants, handling repairs, or managing the property, exchanging the inherited rental into a DST gives you fractional, professionally managed real estate. A sponsor handles all the management, and you receive distributions representing your share of the rental income over a defined hold, commonly around five to seven years. A DST also lets you diversify one inherited property across several DSTs in different markets and sectors, and fractional interests can be easier to divide among siblings or future heirs than a single building. The trade-offs: DSTs are illiquid (you stay invested for the hold), carry fees that reduce returns, and are limited to accredited investors after a suitability review; distributions are projections, not guarantees. So a DST suits an accredited heir who values passivity and can accept the multi-year hold. If you simply want cash, selling soon and relying on the step-up is the simpler route.
Is it better to sell the inherited rental or keep it?
It depends on what you want and on the numbers, but the step-up in basis makes both an early sale and a keep-and-exchange relatively tax-efficient starting points. Selling soon after inheriting is the cleanest choice if you want liquidity and no further involvement, because the stepped-up basis means little or no capital-gains tax on a near-term sale. Keeping makes sense if you want ongoing real estate exposure — but then you should decide whether you want to be an active landlord (keep and rent) or stay passive (keep and 1031 into a DST). Holding the property as a rental means accepting tenants, repairs, and vacancies, and any appreciation above your stepped-up basis becomes a future taxable gain. Many heirs who try active landlording later decide they didn't want the job and move to selling or exchanging into a passive DST. There's no universal answer: weigh your desire for liquidity versus income, your appetite for management, and the property's quality and location. Model the alternatives with your CPA and, if real estate income appeals, talk to an advisor about the DST option.
Glossary
- Step-Up in Basis
- The basis reset at death (IRC §1014) to date-of-death fair market value.
- 1031 Exchange
- A tax-deferred swap of like-kind investment real estate.
- DST
- A Delaware Statutory Trust holding 1031-eligible fractional real estate.
- Revenue Ruling 2004-86
- The IRS ruling treating a DST interest as real property for 1031.
- Capital-Gains Tax
- Tax on appreciation above your basis when you sell.
- Depreciation
- An annual deduction on a rental, taken from the stepped-up basis.
- Alternate Valuation Date
- An estate election to value assets six months after death.
- Qualified Intermediary (QI)
- The party that holds 1031 proceeds so you never receive them.
- Defined Hold
- A DST's multi-year period (often ~5-7 years) before sale.
- Accredited Investor
- An investor meeting income or net-worth thresholds under SEC Rule 501.
Sources & References
- Cornell Legal Information Institute. 26 U.S. Code § 1014 — Basis of property acquired from a decedent
- Cornell Legal Information Institute. 26 U.S. Code § 1031 — Exchange of real property held for productive use or investment
- IRS. Revenue Ruling 2004-86 (Delaware Statutory Trusts)
- IRS. Like-Kind Exchanges — Real Estate Tax Tips
- Baker 1031 Investments. Data Center (DST offering, fee, and performance detail)
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results, including the step-up in basis, depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
