In this 1031 FAQ video, Jeff Peterson discusses what happens when a taxpayer dies during the course of a 1031 exchange. Watch more 1031 educational videos here.
Let's assume that we've got an elderly taxpayer. They sell their relinquished property and unfortunately they die in the midst of the 1031 exchange.
They may have had a replacement property teed up to purchase. The personal representative of the decedent's estate is going to have to make a decision. Do we continue on with the 1031 exchange and buy the teed up replacement property? Or do we just pull up the tent and take our money back on day 181.
It may be most advantageous for the heirs to have the intermediary acquire the replacement property. The reason is that under Section 1014 when you receive property as an inheritance you don't receive it with the decedent’s old basis. You instead receive the property with a stepped-up basis. Upon receipt of that replacement property you get the fair market value of that property as your basis - not the old basis of the relinquished property.
If the 1031 exchange were not completed by the personal representative of the decedent's estate, then on the decedent's final tax return, all income and gains recognized up to the date of death would have to be reported…including the income from the failed exchange.
Many people conducting exchanges particularly when they're older and elderly need to perhaps contemplate in their estate planning documents and give direction to the personal representative to complete the exchange if they unfortunately pass away during the middle of the exchange.
- 1031 Hotline: If you have questions about what happens when a taxpayer dies during an exchange, feel free to call me at 612-643-1031.
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