I am not aware of any authority as to whether, if a taxpayer dies before acquiring the replacement property, her executors would be permitted to complete the Section 1031 exchange. But there is a good chance her executors would be permitted to do so.

Section 1031 is similar to Section 1033 (which allows a taxpayer who has gain on the destruction, theft, seizure, or requisition or condemnation or threat thereof) to defer the gain by purchasing property similar or related in service or use). And there is some authority allowing an executor to purchase replacement property to defer the gain under Section 1033 where the involuntary conversion occurred prior to death. Goodman v. Commissioner, 189 F.2d 895 (3d Cir. 1952, rev’g. 17 T.C. 1017 (1951); Estate of Harry A. Gregg, 69 T.C. 468 (1977); Estate of John E. Morris, 55 T.C. 636 (1971), aff’d. per curiam, 454 F.2d 208 (4th Cir. 1972).

Caution: the above should not be considered as legal advice. The taxpayer should consult with her own counsel, who can give her specific advice based upon the particular facts, her objectives, and her risk tolerance and the other choices available. In particular, given her age, she might want to consider holding the property until her death, in which case the basis step-up will be certain (unless the law is changed to provide for carryover basis at death, or she dies in 2010 and the carryover basis provisions scheduled to be effective for 2010 take effect as scheduled).

Bruce Steiner, attorney
NYC
also admitted in NJ and FL

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