A family that has held Uptown rental property or a Gentilly duplex for two generations eventually runs into a question that has nothing to do with the market: what happens to the tax bill when the property passes to the next generation. Estate tax real estate rules and the income tax basis rules that apply to inherited property are two separate systems, and confusing them is one of the more common mistakes heirs make when they inherit a building instead of cash.
Federal Estate Tax Rarely Applies, but It Is Not Zero
The federal estate tax only applies above a large exemption amount per person, adjusted periodically for inflation, which means most family-owned rental or commercial property in the New Orleans metro passes without triggering any federal estate tax at all. Larger portfolios, especially ones held alongside other significant assets, can still cross that threshold, and Louisiana's own succession process has its own procedural requirements separate from federal estate tax, even when no estate tax is actually owed.
The Basis Step-Up Is the Part That Actually Matters
Far more relevant to most families is the income tax basis step-up. Property owned at death generally gets its basis reset to fair market value as of the date of death, which can erase decades of built-in capital gain and depreciation recapture that the original owner would have owed had they sold instead. An heir who sells shortly after inheriting often owes little or no capital gains tax specifically because of this reset, even on a property that appreciated enormously during the decedent's lifetime.
This is why some longtime owners choose to keep appreciated real estate rather than sell it during their lifetime and pay tax on the gain, planning instead to let the eventual transfer at death reset the basis for their heirs.
Where a 1031 Exchange Fits Into That Planning
An owner who keeps exchanging property throughout their life, deferring gain from one replacement property into the next rather than ever selling outright, can carry that deferred gain all the way to death, at which point the step-up can eliminate it entirely rather than merely deferring it further. This is sometimes described informally as swap until you drop, and while it is not a formal tax provision, it is a common and legitimate strategy for owners who intend to keep real estate in the family rather than cash out.
It is not automatic, and it does not work for everyone; an owner who eventually wants liquidity, or whose heirs would rather sell than manage inherited property, may find that continuing to exchange just delays a tax bill someone in the family will eventually pay. The strategy makes the most sense when the family genuinely intends to hold real estate across generations.
Practical Steps Before the Property Changes Hands
Heirs should get a qualified appraisal establishing fair market value as close to the date of death as possible, since that figure becomes the new basis and the documentation matters if the IRS ever questions a later sale. Families with multiple heirs holding a single property jointly should also think through whether to sell, exchange, or split the property early, since disagreements tend to get harder to resolve the longer several owners hold a single asset together.
Common 1031 Exchange Questions
Does inherited real estate get a stepped-up basis in Louisiana?
Yes. Federal basis step-up rules apply to inherited property regardless of state, resetting the basis to fair market value at the date of death, which often significantly reduces or eliminates the capital gains tax an heir would owe on a later sale.
Will my family owe federal estate tax on a New Orleans rental property?
Most families will not, because the federal estate tax exemption is large enough to exclude the majority of individually owned real estate. Larger combined estates should still review this with an estate attorney rather than assume it does not apply.
Can a 1031 exchange be continued indefinitely instead of ever selling outright?
Yes, an owner can keep exchanging from one replacement property into another for as long as they choose, deferring the gain each time. At death, the basis step-up can eliminate the accumulated deferred gain for the heirs entirely.
What happens to a 1031 exchange in progress if the owner passes away?
This depends heavily on timing and how the exchange is structured; the estate or heirs may need to complete the exchange or unwind it, and this is a situation where the qualified intermediary and an estate attorney need to coordinate quickly.
Should heirs sell inherited property right away to capture the stepped-up basis?
Selling soon after inheriting does capture the reset basis, but it is not the only consideration. Heirs who want to keep the property should know the stepped-up basis stays in place regardless of when they eventually sell, it is not a use-it-quickly benefit.
