For real estate investors ready to simplify
Selling a property is a tax decision first.
When a rental sells, the depreciation taken over the years is taxed at up to 25%, separately from the rest of the gain. How you sell, and in what order, changes the bill. We model every path before you sign anything.
The situation
The equity is real. So is the tax.
You bought well, held for years, and built real equity in rental property. Now the tenant calls matter more than the rent, and you want a simpler life without handing a large share of the gain to the tax bill.
The options often arrive with salespeople attached. A 1031 exchange, a Delaware statutory trust, an outright sale, or simply holding on each carry different tax, liquidity, and estate results, and one choice changes the others in ways that are easy to miss.
We run the numbers for each property, then choose the path.
Why it’s complex
Five things that set the after-tax number
Recapture is its own tax
Depreciation taken on a rental is taxed at up to 25% at sale, apart from the capital-gains rate. Long-held properties often carry more recapture than owners expect.
Read the guideGains stack on top of income
Long-term gains sit on top of ordinary income, so where the 0% and 15% lines fall depends on the rest of the year. Spreading a sale can keep more of it lower.
Read the guideDeferral trades away flexibility
A 1031 exchange defers the tax, but replacement property ties up the equity again. Deferral only helps if you can use the time.
See the strategyThe step-up converts deferral
Property held at death generally resets to fair market value, which can erase a deferred gain for heirs. That changes the answer for many owners in their sixties.
Read the guideDo not let the tax lead
Trading one illiquid, concentrated position for another to avoid a tax bill is a common trap. Sometimes paying the tax restores more than it costs.
Read the guideSources: IRS Topic No. 409; IRC §168(c); IRC §1031 and Treas. Reg. §1.1031(k)-1; IRC §121.
Our approach
Each property modeled on its own
We do not treat a set of rentals as one block. Each property has its own basis, depreciation history, and story, so each gets its own after-tax model before any path is chosen.
Did you ever live in it?
A former home may qualify for the §121 exclusion of $250,000 single or $500,000 joint, if it was your residence for two of the five years before sale. Depreciation taken after May 6, 1997 is still recaptured.
Run three paths side by side
An outright sale with recapture and gain shown separately, a 1031 into a DST interest with its hold period and fees laid out, and a hold path reviewed against the step-up with your estate attorney.
Keep the calendar
Replacement property must be identified within 45 days and acquired within 180, with no extensions for weekends or holidays, and a qualified intermediary must hold the proceeds. A DST interest can qualify as replacement property (IRS Rev. Rul. 2004-86).
Build the income portfolio
Liquid proceeds become a diversified income portfolio, no longer concentrated in one asset class. Deferred gains are tracked alongside Roth conversions, required distributions, and the estate in our Quarterly Rounds.
The work
What you’ll work through with us
- An after-tax model of each property: basis, recapture, and gain
- A §121 review for any property that was once your home
- A three-way comparison: outright sale, 1031 or DST exchange, and hold
- DST and UPREIT options compared across sponsors, with no placement fees to us
- Coordination with your CPA and qualified intermediary on the exchange calendar
- An estate review of the step-up with your attorney
- An income portfolio built from the proceeds
- A concentration check on real estate across the whole balance sheet
Real estate planning at the firm is led by Theo Halbardier, CFP®, CIMA®, CAIA®, the firm’s founder. We are fee-only: no commissions, no product sales. About Theo
Questions
Common questions from real estate investors
Do you sell DSTs or earn anything on an exchange?
No. We receive no placement fees, commissions, or sponsor compensation on any exchange vehicle. We evaluate DST and UPREIT options across sponsors, model the after-tax outcome of each path, and coordinate with your CPA and qualified intermediary. We are paid only by you.
Is a 1031 exchange always the right answer?
No. It is one tool. A household that needs liquidity, wants to leave real estate entirely, or holds property with a small gain may do better with a straightforward sale.
How much of my gain is recapture?
Roughly the depreciation you took, or were entitled to take, over the years you owned the property. On a rental held fifteen or twenty years that can be a large share of the total. We pull the depreciation schedules from past returns with your CPA to get the exact figure.
What happens to deferred gain when I die?
Under current law, assets held at death receive a basis step-up to fair market value (IRC §1014), which can eliminate the deferred gain for heirs. That changes the math for many households, and it is a reason to coordinate the exchange decision with your estate attorney.
Does the 3.8% surtax apply to a rental sale?
For most investors, yes. Gain on a rental held as an investment is net investment income, and the 3.8% tax applies above $250,000 of MAGI on a joint return (IRC §1411). A sale year often crosses that line even when other years do not.
Can I exchange into something passive and still keep the income?
Often, yes. A DST interest or an UPREIT structure replaces active management with a passive interest. Each has different minimum equity, distribution, liquidity, and exit terms, and we compare them for your situation specifically.
Reviewed by Theo Halbardier, CFP® · Updated September 2026 · Figures current for 2026
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