Transitioning from Ownership: Exit Planning and 1031 Strategies

Planning your exit from real estate ownership requires understanding capital gains treatment, 1031 alternatives, and succession planning.

Capital gains planning. When you sell a depreciated rental property, you face two layers of tax: depreciation recapture at up to 25% (Section 1250) on the depreciation you claimed, plus long-term capital gains at 15% or 20% on the remaining appreciation. A CPA models the combined tax liability before you list.

Installment sales. Under IRC 453, you can spread the gain over multiple years by receiving payments over time. This keeps you in lower tax brackets each year instead of recognizing a large gain all at once. The buyer pays interest on the deferred balance.

1031 into DSTs. If you want passive income without management responsibilities, you can 1031 exchange into a Delaware Statutory Trust. DSTs hold institutional-grade real estate managed by professionals. You defer the gain and receive monthly distributions without landlord duties.

Timing sales across tax years. Closing a sale on January 2 instead of December 30 pushes the entire gain into the next tax year. When combined with installment sale elections, this gives you two years of planning runway.

The tradeoff: Every deferral strategy -- installment sales, 1031 exchanges, DSTs -- delays the tax bill but doesn't eliminate it. Eventually, someone pays the tax, whether that's you or your heirs.