You have six options, not two.

Option 1. Sell outright and pay the tax

The simplest path, and sometimes the right one. You get every dollar of the after-tax proceeds with no strings, no lockup, and no ongoing relationship with a sponsor or a tenant.

This is the right answer when: your gain is modest, your capital gains rate is 0 or 15 percent rather than 20, you have suspended passive activity losses that will offset much of the gain when you dispose of the property, you need the cash for a specific purpose such as buying a home or funding care, or the complexity of an exchange simply is not worth it to you. Some people value simplicity more than money, and that is a legitimate choice.

The cost: on a long-held property in a high-tax state, you are typically giving up somewhere between a quarter and a bit over a third of the sale price. That capital never compounds for you again.

Option 2. Keep the property

Doing nothing is a real strategy, not a failure to decide. Under current law your heirs receive the property at its fair market value on the date of your death. Every dollar of deferred gain and every year of depreciation recapture disappears at that moment.

This is the right answer when: you are older, the property is genuinely low-maintenance, the income covers what you need, and you have heirs. If you are seventy-eight with a triple-net leased building and a good property manager, the cleanest plan may be no plan at all.

The cost: you keep doing the work, you keep the concentration risk of one property in one market, and you keep collecting below-market rent if that is your situation. Many owners who tell us they will "just hold it" are describing an intention rather than a plan, and end up selling in a hurry three years later under worse conditions.

Option 3. 1031 exchange into another building

You defer the entire tax and buy a different property to own and operate. Owners use this to trade up in quality, move from a high-maintenance property to a low-maintenance one, relocate their real estate closer to where they now live, or shift from residential into a net-leased commercial building with a corporate tenant.

This is the right answer when: you actually like owning real estate and the problem is the specific property, not the activity. Trading a 1960s duplex with deferred maintenance for a newer building with a national tenant on a fifteen-year lease can transform the experience without ending it.

The cost: you are still a landlord. You also have to find, finance, and close on a specific building inside 180 days, in a market where good properties attract competing offers and lenders move slowly. Exchange buyers are known to be on a clock, which does not help you negotiate.

Option 4. 1031 exchange into a Delaware Statutory Trust

You defer the entire tax and buy fractional interests in institutional real estate that professionals manage. You receive monthly income and never do any work.

This is the right answer when: the activity itself is the problem. You are done with tenants, you want the income to continue, and you want the tax deferred. It is also the answer when you need to split proceeds across several investments, when you need to hit a specific dollar amount exactly to avoid boot, or when you need a replacement property that can close in days rather than months.

The cost: illiquidity for five to ten years, no control over anything, reliance on a sponsor's competence, and front-end fees that commonly run 8 to 12 percent of the amount invested. These are real and they are covered in detail on the DST page.

Option 5. 1031 into a DST, then a 721 UPREIT

A variation on option four. Some DSTs are structured so that after a holding period the property is contributed to a real estate investment trust's operating partnership in exchange for units. That contribution is not taxable, and you end up owning a slice of a large diversified portfolio instead of one building.

This is the right answer when: you want eventual partial liquidity, you want your heirs to inherit something simple to divide, and you accept that this is the last 1031 exchange you will ever do.

The cost: once you hold partnership units, future 1031 exchanges are permanently off the table, because units are not like-kind real property. Converting units to cash triggers the deferred tax. You also take on the performance of an entire REIT and its management.

Full comparison of DSTs against REITs →  ·  The 721 UPREIT in depth →

Option 6. Installment sale, charitable remainder trust, or Opportunity Zone

Three different tools that all spread or reshape the tax rather than deferring it into more real estate.

• Reverse exchange note. If the replacement property appears before you have sold, see reverse 1031 exchanges.
• Installment sale. You carry the note and the buyer pays you over years. The gain is recognized as payments arrive, which can keep you out of the top bracket in any single year. Depreciation recapture, however, is generally recognized in full in the year of sale regardless. You also take on the credit risk of your buyer.
• Charitable remainder trust. You contribute the property to a trust, the trust sells it with no immediate tax, and you receive an income stream for life or a term of years. You get a partial charitable deduction now. Whatever remains goes to charity at the end. This suits owners who are genuinely charitable, want lifetime income, and are comfortable that their heirs will not receive the asset.
• Qualified Opportunity Zone fund. You reinvest the capital gain, not the whole proceeds, into a designated fund. The gain is deferred to a fixed future date and the fund's own appreciation can become tax-free after ten years. Two catches matter here: it does not defer depreciation recapture on real property, and the deferral has an expiration date, so you need a plan for paying that bill when it arrives.

When a 1031 exchange is the wrong answer

We would rather tell you this on a free call than after you have paid us.

• Your gain is small. If the tax would be $25,000, the fees and complexity of an exchange are hard to justify. Sell it, pay it, be done.
• You need the cash. An exchange requires reinvesting everything. If you are selling because you need money for a house, a business, or medical care, a partial exchange or an outright sale may serve you better.
• You are elderly with a manageable property. If holding until death achieves the same tax result with less complexity and fewer fees, hold.
• Your income is low. A retiree with modest income may face a 0 or 15 percent federal capital gains rate. The deferral is worth much less at those rates.
• You have large suspended passive losses. Disposing of the property in a fully taxable sale can free up years of accumulated losses to offset the gain. Doing an exchange keeps them suspended. Your CPA should run this comparison.
• You would be buying something you do not understand. Never let a deadline push you into an investment you cannot explain to your spouse. Paying the tax is better than losing the principal.