Selling a Rental Property? Decide These Things Before You Close
Most of the choices that affect the tax on a rental sale have to be made before closing. This page lists them in order, with a tool or a guide for each, so you know what to ask your CPA and when to bring in an exchange specialist.
On this page
The choice in one minute
When you sell a rental, you have three broad options:
- Sell and pay the tax. The simplest path, and often right if you are leaving real estate.
- Exchange and defer. Under section 1031, you can defer tax on the gain by buying other real estate for investment or business use, within set deadlines and through a qualified intermediary. The tax is deferred, not eliminated: your basis carries over to the new property (26 U.S.C. §1031(d)).
- Do some of each. A partial exchange defers part of the gain; the cash you keep is taxable.
The exchange option only exists if it is set up before the sale closes.
Seven decisions to make before closing
1. Will you buy other investment real estate? An exchange only makes sense if you plan to stay invested in real estate. If you don't, read taxes when selling a rental property. If you do, read selling a rental and buying another.
2. What would the sale cost in tax? Federal tax on a rental sale usually has more than one layer: long-term capital gains rates, a rate of up to 25% on gain that comes from depreciation you took (unrecaptured section 1250 gain), and for some taxpayers the 3.8% net investment income tax. Your state may tax the gain too. For a first estimate, use the capital gains calculator, the depreciation recapture calculator or the 1031 exchange calculator. They show results on your screen without asking for contact details. Your CPA has the real numbers.
3. How is the property owned? In your own name, with a spouse, in an LLC, with partners? The owner that sells is generally the one that has to buy. An interest in a partnership generally cannot itself be exchanged (Treas. Reg. §1.1031(a)-3(a)(5)(i)(C)). If co-owners want different things, sort that out well before listing. See 1031 exchanges and LLCs.
4. Has it always been a rental? Section 1031 covers real estate held for investment or business use, not your own home (26 U.S.C. §1031(a)(1)). A former home that is now rented, a rental you sometimes use yourself, or an inherited property each raise their own questions. See a home converted to a rental, vacation homes and selling an inherited rental.
5. Will you reinvest everything, or take some cash? Cash you take out, or debt that is paid off and not replaced, is generally taxable "boot" (26 U.S.C. §1031(b) and (d); Treas. Reg. §1.1031(d)-2). See partial exchanges and boot.
6. Can you meet the timeline? After closing you have 45 days to identify replacement property in writing. You must receive it by the earlier of day 180 or the due date, including extensions, of your tax return for the year of the sale (26 U.S.C. §1031(a)(3)). There are no routine extensions. Count your dates in the deadline calculator, and read the timeline.
7. Do you need to buy before you sell? Then it is a reverse exchange, which has to be arranged before the purchase.
What to do at each stage of the sale
| Where you are | What to do now |
|---|---|
| Researching | Estimate the tax, decide whether you will buy again, and ask your CPA for your basis and depreciation figures |
| Preparing to list | Settle how the property is owned, choose an exchange specialist, and tell your broker and attorney you may exchange |
| Listed | Start looking at replacement property; the 45 days go quickly |
| Under contract | Sign the exchange agreement and have the closing agent instructed before closing |
| Already closed | If the proceeds went to a qualified intermediary, your 45 days are running. If they were paid to you, an exchange is generally no longer possible; talk to your CPA about reporting the sale |
What can't be fixed after closing
- Receiving the money. If all the sale proceeds are paid to you, or you can draw on them, the transaction is treated as a sale, even if you buy another property soon after. Receiving part of them is taxable to that extent (Treas. Reg. §1.1031(k)-1(f)).
- Choosing the intermediary. The qualified intermediary has to be in place before closing, and it cannot be someone who has been your agent, attorney, accountant or broker in the past two years (Treas. Reg. §1.1031(k)-1(k)).
- The clock. The 45 and 180 days start when the sale closes, whether or not you are ready.
Talk through your sale with Leah
Four quick questions. Leah reads every request herself. Afterwards you can pick a time for a 15-minute call, or wait for her reply by email.
Request received
Nothing is scheduled yet. Leah will reply by email, or by phone if you gave a number, to arrange a time to talk. You can also pick a time yourself below.
Optional: pick a time now
If you like, choose a 15-minute slot on Leah’s calendar and she will call you then. Or simply wait for her reply.
The calendar is run by Calendly and opens on this page. Your first name, email and the sale details you just entered are passed to it, so you don’t have to type them again. Open the calendar in a new tab if you prefer.
Your 15-minute call is scheduled. Calendly has emailed you the details, and Leah will call the number you gave.
Useful to have to hand
- The property state and how the property is owned (your name, an LLC, a partnership)
- Your expected closing date, or where the sale stands
- What you are thinking of buying next, if you know
- The names of your CPA and closing attorney or title company, if you have them
Closing soon or already closed? Reply to the confirmation email with the date so Leah sees it first.
Leah Badach is a Certified Exchange Specialist with 11+ years of 1031 exchange experience. She is not your CPA or attorney and does not give tax or legal advice. The qualified intermediary that holds your funds is a company: before you sign, Leah confirms in writing which one, and gives you its account, bond and insurance documents. More about the exchange planning call.
Frequently asked questions
Do I have to do a 1031 exchange when I sell a rental?
No. It is a choice. If you would rather take the money and pay the tax, you can. An exchange suits owners who want to keep their equity invested in real estate.
Is the tax gone if I exchange?
No. It is deferred. Your basis carries over into the replacement property, so the gain is taxed when you later sell in a taxable sale (26 U.S.C. §1031(d)).
When is it too late to decide?
At closing. The exchange agreement has to be signed, and the closing agent instructed, before the sale closes.
Can I exchange my rental for a different kind of property?
Generally yes, if both are U.S. real estate held for investment or business use. A rental house can be exchanged for an apartment building, a commercial property or land, for example. Real estate outside the United States is not like-kind to U.S. real estate (26 U.S.C. §1031(h)).
Can I use the calculators without giving my email?
Yes. The results appear on your screen. The figures you type stay in your browser unless you choose to send them.
Sources
- 26 U.S.C. §1031: qualifying property, deadlines, boot and basis.
- Treas. Reg. §1.1031(k)-1: receipt of proceeds, qualified intermediaries and disqualified persons.
- Treas. Reg. §1.1031(d)-2: how debt that is paid off counts in an exchange.
- Treas. Reg. §1.1031(a)-3: what counts as real property.
- IRS Topic No. 409, Capital gains and losses: capital gains rates and unrecaptured section 1250 gain.
- IRS Topic No. 559, Net investment income tax: the 3.8% tax.
- Instructions for Form 8824: reporting an exchange.
Educational information, not tax or legal advice.
Not sure whether to exchange?
Tell Leah where your sale stands. She will walk through the timing and the next steps with you. No obligation.
Request an exchange planning call