Does a rental sale make my Social Security benefits taxable, and does a 1031 help?

The gain lands inside the formula that taxes your benefits

Section 86(b) applies when your modified adjusted gross income plus 'one-half of the social security benefits received during the taxable year' exceeds the base amount. Modified AGI here is AGI before counting benefits, increased by tax-exempt interest, so capital gain and depreciation recapture from a sale count in full.

The base amount is $25,000, or $32,000 on a joint return; the adjusted base amount is $34,000, or $44,000 joint. Publication 915 uses the same figures for 2025, because the statute does not index them.

Above the adjusted base, 85 cents of benefits becomes taxable for each additional dollar of income, until the cap at 85% of benefits. A rental gain of almost any size reaches that cap.

Between the two thresholds, up to half of benefits can be taxed; above the higher one, up to 85%. If a pension or IRA withdrawals already put you between the thresholds, the sale's effect is the jump from a partial taxable share to the full 85% for that year.

Your checks do not shrink; your tax bill does the work

The retirement earnings test, which can withhold benefits before full retirement age, counts only 'wages for services rendered' and net earnings from self-employment under 20 CFR 404.429.

Gain on selling a rental is not self-employment income: section 1402(a)(3) excludes gain from the sale of property that is not inventory or held for sale to customers. So the benefit amount is unchanged and the cost shows up only on your return.

Medicare premiums are a separate effect two years later; see whether selling your rental raises Medicare premiums.

The 2025 law added a second phase-out on the same income

Public Law 119-21 created a $6,000 deduction for each taxpayer aged 65 or older for 2025 through 2028. Under section 151(d)(5) it is reduced by '6 percent of so much of the taxpayer's modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).'

The IRS summary confirms it is $12,000 for a couple where both qualify and is available whether or not you itemize. A sale gain counts in that modified AGI as well, so a large gain can erase the deduction for the year.

The arithmetic is quick. At 6 cents per dollar, a single filer's $6,000 is gone once modified AGI passes $175,000, which a mid-sized rental gain on its own will exceed. The deduction returns the following year if income falls back, so this is a sale-year cost like the benefit tax itself.

Worked example: $200,000 of gain on a single retiree's return

Hypothetical, round numbers, 2026 law; run your own numbers with your CPA. A single retiree aged 70 receives $30,000 of benefits and $25,000 of pension income. Her test income is $40,000, and the section 86 formula makes $9,600 of benefits taxable. AGI is $34,600, so the full $6,000 senior deduction applies.

She sells a rental with a $200,000 gain. Test income jumps to $240,000 and taxable benefits rise to the $25,500 cap, 85% of $30,000. AGI becomes $250,500, and 6% of the $175,500 excess over $75,000 wipes out the senior deduction.

Beyond the tax on the gain itself, she now pays ordinary rates on $15,900 more of benefits and loses a $6,000 deduction: $21,900 of extra taxable ordinary income created by the sale. Exchanging the whole property leaves all three figures where they were.

Where the exchange and the replacement change the answer

Deferral works only for gain that is not recognized. Cash or debt relief you keep is boot, and it enters the formula like any other gain (what counts as boot).

Replacement income matters every year after. A Delaware Statutory Trust interest reports its share of rental income, which also enters the section 86 test; how that interacts with benefits is covered in DST income alongside Social Security.

If you would rather sell, spreading the gain with an installment sale can keep some years below the 85% cap. Compare both paths in retire and sell versus a 1031.