The 1031 Exchange Exit Ramp That Lets a Retiring Landlord Defer $720,000 of Capital Gains and Consolidate Three Rentals Into One Replacement Property

"Selling three rental houses after nearly three decades of ownership feels like the definition of a financial win, but the tax bill that arrives alongside it can take a significant portion of that win before the landlord has a chance to spend or reinvest any of it."

"For a 66-year-old with $1.4 million in combined property value, a $400,000 original cost basis, and $300,000 in accumulated depreciation, a straightforward cash sale triggers roughly $250,000 in federal taxes. A properly structured 1031 exchange defers all of it."

"A cash sale on all three properties at $1.4 million produces approximately $720,000 in long-term capital gains after accounting for the adjusted cost basis, plus $300,000 in depreciation recapture from the deductions claimed over the ownership period. Long-term capital gains at this income level are subject to a combined federal rate of 23.8%, including the new investment income tax, resulting in approximately $171,000 in LTCG tax. Depreciation recapture is taxed up to 25% regardless of the taxpayer's capital gains bracket, adding another $75,000."

"A completed 1031 exchange under IRC §1031 defers every dollar of that liability. The three properties are sold, the proceeds flow through a Qualified Intermediary rather than touching the landlord's bank account, and replacement property of equal or greater value is acquired within the statutory timeline. No gain is recognized, no depreciation recapture is triggered, and the t"

Selling long-held rental properties can create substantial taxable gain, including long-term capital gains and depreciation recapture. In the example, $1.4 million of combined property value with a $400,000 cost basis and $300,000 accumulated depreciation produces about $720,000 in long-term capital gains and $300,000 in depreciation recapture. Federal tax exposure is estimated at roughly $246,000, before any state taxes, using a combined 23.8% rate for long-term capital gains and up to a 25% rate for depreciation recapture. A properly completed IRC §1031 exchange defers recognition of gain and avoids triggering depreciation recapture by routing proceeds through a Qualified Intermediary and acquiring replacement property within required timelines.

Read at 24/7 Wall St.