THE PLUMBING: Six Mechanisms. 425 Years. The Answer to "How Is This Legal?"
Post 1: The Oldest Pipe — Elizabeth I. 1601. The charitable trust. The founding irony.
Post 2: The 1921 Room — Stepped-up basis + 1031. Born together. ← YOU ARE HERE
Post 3: The Wildcatter's Gift — Carried interest. The lord's share of the harvest.
Post 4: The Race to the Bottom — Delaware LLC. Venice to Wilmington.
Post 5: The Invisible Subsidiary — Check-the-Box. The regulation nobody voted for.
Post 6: The Island — Cayman Islands. $6 trillion. $100 billion per year.
Post 7: The Complete Stack — All six. One deal. Everything legal. Everything documented.
Post 8: July 4, 2025 — The OBBBA. The Magna Carta moment. The pipes made permanent.
In the summer of 1921, Congress passed the Revenue Act of 1921 — the first major overhaul of the income tax code since the 16th Amendment made the income tax permanent in 1913. The people writing it were, many of them, the people who had just become subject to it: wealthy industrialists, landowners, railroad men, bankers. They had eight years since 1913 to identify exactly which features of the new income tax most threatened the intergenerational transmission of the wealth they had accumulated. They used those eight years well. In a single legislative act, they created two mechanisms that together make it possible for accumulated wealth to travel across generations without ever fully meeting a tax obligation: stepped-up basis, which erases embedded capital gains at death; and the 1031 exchange, which allows indefinite deferral of those gains during life through property swaps. Both were justified by stated rationales that were at least partially legitimate. Both carry water their stated rationales did not advertise. Both are intact in 2026, 104 years after they were installed in the same room, by the same Congress, in the same act. The entailed estate and the manor swap, modernized. The feudal mechanisms that preserved dynastic wealth across the generations of the English landed class, translated into American tax law in the summer of 1921. They have been working ever since.
The Feudal Ancestors: What 1921 Was Modernizing
To understand why stepped-up basis and the 1031 exchange were created together — and why they work together so effectively — you need to understand the feudal mechanisms they descended from.
In medieval England, the greatest threat to dynastic wealth was not taxation in the modern sense. It was the cascade of obligations that attached to land when it changed hands — particularly at death. When a lord died, his heir owed the king a "relief" — a payment to inherit the estate. If the heir was a minor, the king could take wardship of the estate and its revenues until the heir came of age. The estate was vulnerable at precisely the moment of generational transition.
The English landed class developed two responses to this vulnerability. The first was the entailed estate: land legally locked to pass intact to the eldest son, generation after generation, immune to division, sale, or the ordinary economic forces that dispersed other wealth. The accumulation inside an entailed estate could not be taxed at transfer because the transfer was legally instantaneous and continuous — the estate never truly changed hands, it simply passed. The obligation at the moment of death: minimized. The accumulated wealth: preserved intact.
The second was the manor swap: the right of a lord to exchange one landed estate for another of equivalent value without triggering the obligations that attached to an outright purchase. If you sold your manor, you realized a gain and owed obligations. If you swapped it for another manor of equivalent value, you had not "sold" anything — you had simply exchanged one form of the same asset for another. The gain was not realized. The obligation did not attach.
In 1921, Congress created stepped-up basis and the 1031 exchange. The entailed estate and the manor swap. The mechanisms are different in their technical operation but identical in their structural function: they ensure that the wealth accumulated inside an asset — whether through appreciation during life or through the compounding across generations — never fully meets the tax obligation that ordinary income triggers.
Mechanism 1 — The Entailed Estate
Stepped-Up Basis
Feudal ancestor: The entailed estate — land locked to pass intact across generations, with accumulated obligations erased at each transfer.
When an asset is inherited, its cost basis for tax purposes is "stepped up" to its current market value. The embedded gain — the appreciation that accumulated during the decedent's lifetime — disappears. The heir inherits as if they had purchased the asset at today's price. If they sell immediately, they owe nothing on decades of appreciation. The gain existed. It was real. It is gone.
$230B
Per decade in foregone revenue if reformed via carryover basis — CBO estimate
Mechanism 2 — The Manor Swap
The 1031 Exchange
Feudal ancestor: The lord's right to exchange one manor for another without triggering the obligations that attached to an outright sale.
When "like-kind" real property is exchanged for other real property, the capital gain is deferred — not eliminated, but postponed indefinitely. Roll the proceeds into the next property. And the next. And the next. At death, the accumulated deferred gain meets stepped-up basis and disappears entirely. During life: perpetual deferral. At death: permanent erasure. Together: no gain is ever taxed.
$30B+
Per year in foregone revenue — Joint Committee on Taxation
The Math That Makes the Combination Lethal
Neither mechanism alone is as powerful as the two operating in concert. Post 1 introduced the concept of accretion — how mechanisms combine into something more powerful than any individual pipe. The 1921 Room is the clearest demonstration of this principle in the entire plumbing system.
The Buy-Borrow-Die Strategy — How the Two Mechanisms Work Together
Scenario A: The Ordinary Taxpayer — No Mechanisms
Asset purchased$1,000,000
Asset sold 30 years later$5,000,000
Capital gain realized$4,000,000
Federal capital gains tax (23.8%)$952,000
Net after tax$4,048,000
Scenario B: 1031 Exchange During Life + Stepped-Up Basis at Death
Asset purchased$1,000,000
Appreciated to $5,000,000 — 1031 into next propertyGain deferred
Second property appreciates to $12,000,000 — 1031 againGain deferred
Total deferred gain carried forward at death$11,000,000
Stepped-up basis applied at deathBasis reset to $12,000,000
Embedded gain remaining after step-up$0
Federal capital gains tax on $11,000,000 of appreciation$0
What the 1921 Room costs on this transaction$2,618,000 (foregone at 23.8%)
Scenario C: Add the "Borrow" — No Sale Required During Life
Hold appreciated asset — never sell, never trigger gain$12,000,000 asset
Borrow against asset at low interest rate$8,000,000 loan
Loan proceeds: taxable?No — debt is not income
Live on loan proceeds for decadesTax-free liquidity
At death: stepped-up basis erases gain, heirs sell to repay loanClean exit
Total tax on $11M appreciation across a lifetime and an inheritanceApproximately $0
The strategy has a name in tax planning circles: Buy, Borrow, Die. Buy appreciating assets. Borrow against them for liquidity — loans are not taxable income. Die holding them — stepped-up basis erases the accumulated gain. The 1031 exchange handles the interim: if you do need to swap one asset for another during life, you roll the gain forward rather than paying it. At death, the forward-rolled gain meets stepped-up basis and disappears.
Buy. Borrow. Die. The full cycle costs, in the scenario above, approximately zero dollars in federal capital gains tax on $11 million of real appreciation. The family that enters the cycle at generation one exits at generation three or four having compounded their wealth across lifetimes at the preferential rate of nothing.
🔥 Smoking Gun #1
The People Who Wrote the Mechanisms Had Just Become Subject to the Tax the Mechanisms Were Designed to Avoid
The 16th Amendment, ratifying the permanent income tax, was ratified in February 1913. The Revenue Act of 1921 — which created both stepped-up basis and the 1031 exchange — was passed eight years later. In those eight years, the wealthiest Americans had experienced, for the first time, the systematic annual obligation of the income tax on their accumulated wealth.
The Senate Finance Committee that drafted the Revenue Act of 1921 included members with significant landholdings and real estate interests. The House Ways and Means Committee was similarly constituted. This is not unusual — congressional committees that draft tax legislation tend to include members with the most at stake in the outcome. What is notable is the simultaneity: two mechanisms that together enable permanent avoidance of capital gains taxation on real property were created in the same act, by the same Congress, in the first major tax code revision after the income tax became permanent.
The stated rationale for stepped-up basis: Prevent double taxation. If an estate pays estate tax on an inherited asset, taxing the heir's capital gain on the same appreciation would tax the same wealth twice. This rationale has genuine merit — for estates large enough to pay estate tax. For the vast majority of inherited assets that pass below the estate tax threshold, stepped-up basis provides a windfall with no corresponding double-taxation concern.
The stated rationale for the 1031 exchange: Prevent "lock-in" — the perverse incentive to hold an appreciated asset rather than sell it because the tax on the gain is too large. If a farmer wants to swap his land for a different farm better suited to his needs, he should not be forced to pay tax on the appreciation just to make a sensible economic decision. This rationale also has genuine merit — for the farmers it was nominally designed for. For the private equity firms rolling Greenstone's $14 million profit into the next water rights acquisition, the farmer's rationale is carrying very different water.
The Revenue Act of 1921 was written by people who had just become subject to the income tax and had eight years to identify exactly which features of it most threatened their wealth. They created two mechanisms in a single act that together enable the permanent avoidance of capital gains taxation on real property across lifetimes and generations. The stated rationales were real. The mechanisms they produced are 104 years old, intact, and operating far beyond anything those stated rationales could justify.
104 Years of Reform Attempts — The Complete Record
"The 1031 exchange was created for a farmer who wanted to swap his land for a better farm. It is now used to roll $14 million in profit from one water rights acquisition into the next. The farmer's rationale is still in the statute. The farmer's transaction is not what the statute primarily serves."
— The gap between stated purpose and documented use, 1921–2026
🔥 Smoking Gun #2
The National Association of Realtors Spent $84 Million in 2021 — Its Highest Annual Lobbying Total on Record — Largely to Preserve Mechanisms Created in 1921
The Biden administration's 2021 proposals to cap 1031 exchange deferrals at $500,000 per year and eliminate stepped-up basis for gains above $1 million were substantive reforms. They were not radical — they retained significant protections for family farms and small businesses. They would have raised hundreds of billions in revenue over a decade.
The response: the National Association of Realtors spent more than $84 million lobbying in 2021 — its highest recorded annual lobbying expenditure. The American Investment Council and other PE-aligned groups deployed additional resources. The proposals were removed from the legislation before passage.
The arithmetic of defense: The 1031 exchange costs the Treasury $30+ billion per year. Defending it cost the NAR $84 million in one year. If the mechanism survives one year of reform pressure at a cost of $84 million, the return on that lobbying investment — measured in preserved tax deferrals — is approximately 357:1. The mechanism funds its own defense with orders of magnitude to spare. This is why the 1921 Room has survived 104 years of reform attempts. Not because the stated rationales are unassailable. Because the returns from the mechanisms are large enough that defending them is one of the most cost-effective investments their beneficiaries can make.
Who benefits from the defense: The top 1% of taxpayers receive the overwhelming majority of 1031 exchange and stepped-up basis benefits. A 2021 Treasury analysis found that the top 1% of estates account for the majority of stepped-up basis gains. The $84 million spent defending these mechanisms in 2021 was spent by an industry whose members' clients disproportionately hold the assets that benefit from them.
The 1921 Room has survived 104 years not because it is unreformable in principle but because the returns from its mechanisms are large enough that defending them is spectacularly cost-effective. $84 million in lobbying preserved $30+ billion per year in tax deferrals. The ratio: 357:1. The mechanism funds its own defense. That is its most durable feature — not the stated rationale, but the self-financing nature of the protection it provides to the people who benefit from it.
✓ The Full Account: The Legitimate Cases for Both Mechanisms
Stepped-up basis and the double-taxation argument: When a large estate pays estate tax — currently triggered above $13.6 million per person before OBBBA, $15 million after — the same underlying appreciation that generates the estate tax also generates embedded capital gains. Taxing both the estate and the heir's eventual capital gain on the same appreciation is genuinely double taxation. The stepped-up basis provision prevents it. The problem: only the largest estates pay estate tax. For the vast majority of inherited assets that pass below the threshold, stepped-up basis provides the benefit without the corresponding double-taxation concern.
The 1031 exchange and the lock-in problem: Without the 1031 exchange, a property owner who wants to sell one investment property and buy a better one would owe capital gains tax on the sale — which might consume enough of the proceeds to prevent the purchase. This creates a "lock-in" effect where tax considerations distort economic decisions: property holders keep suboptimal assets rather than reallocate to more productive uses. The 1031 exchange eliminates this distortion. For a small landlord swapping one rental property for a better one, this is a real and defensible benefit. For a private equity firm rolling $100 million in water rights positions from one county to the next, the small landlord's rationale is carrying their transaction.
The honest accounting: Both mechanisms solve real problems. Both mechanisms have grown far beyond the problems they were designed to solve. The distance between the stated rationale and the documented use is the plumbing's most consistent feature across all six mechanisms.
The Finding — Post 2
"In 1921, the people who had just become subject to the income tax wrote their exits into the first draft. They created two mechanisms in a single act — stepped-up basis and the 1031 exchange — that together make it possible for wealth to travel across generations without ever fully meeting a tax obligation. The feudal entail and the manor swap, modernized. 104 years later, the mechanisms are more protected than when they were installed. The returns they preserve fund the lobbying that defends them. The 1921 Room is self-maintaining."
Next: Post 3 — The Wildcatter's Gift. In 1954, oil and gas wildcatters successfully argued that their share of drilling profits should be taxed as capital gains rather than ordinary income — because they contributed expertise rather than capital. By the 1980s, private equity managers had borrowed this logic entirely. The lord's share of the harvest, updated for the age of leveraged buyouts. The carried interest loophole. Every reform attempt since 2007. Why it survives. What it costs. And why the UK closed it in 2026 while the United States, in the same year, left it intact.
METHODOLOGY — POST 2: All figures primary-sourced. Revenue Act of 1921 (creating stepped-up basis and 1031 exchange simultaneously): confirmed via IRS historical tax records and Tax Policy Center historical analysis. Stepped-up basis $230B per decade estimate: confirmed via Congressional Budget Office "Options for Reducing the Deficit" (2023 edition). 1031 exchange $30B+ annual cost: confirmed via Joint Committee on Taxation estimates. The Starker case (Starker v. United States, 602 F.2d 1341, 9th Cir. 1979): confirmed via federal court records. 1984 deadlines (45-day/180-day): confirmed via IRC Section 1031 as amended by Deficit Reduction Act of 1984. EGTRRA 2001 carryover basis provision and 2010 repeal: confirmed via Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. TCJA 2017 personal property exchange elimination: confirmed via IRC Section 1031 as amended. Biden 2021 proposals ($500K 1031 cap, $1M stepped-up threshold): confirmed via Treasury Greenbook FY2022. NAR $84 million lobbying 2021: confirmed via OpenSecrets.org (lobbying database). OBBBA estate exemption $15M/person, no sunset (P.L. 119-21, signed July 4, 2025): confirmed via Congress.gov. Buy-Borrow-Die strategy: documented via ProPublica "The Secret IRS Files" (2021) and multiple tax policy sources. Top 1% share of stepped-up basis benefits: confirmed via Treasury analysis cited in Biden administration FY2022 budget documents. 1976 carryover basis enactment and 1980 repeal: confirmed via Tax Equity and Fiscal Responsibility Act of 1982 legislative history and IRS history documents.
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