Sell a Rental and Buy Another Without Paying Tax Now: Exchange Today or Sell and Rebuy Later

The decision is a bet that prices will fall by more than the tax you would pay to sit in cash

An exchange keeps all of your equity in real estate and pushes the gain into the replacement's basis under section 1031(d). Selling outright pays the tax now and leaves a smaller pile of cash to buy with later.

If prices do fall, the patient seller may buy more property per dollar. If they rise or hold flat, the seller has less equity, a higher price to pay and a second set of closing costs. The tax already paid does not come back either way.

The comparison below holds the purchase price constant so the only moving parts are the tax, the basis and the time in cash.

Worked model: a $1,000,000 sale leaves $884,589, so prices must fall 11.5% to break even

Hypothetical round numbers for a married couple filing jointly with $200,000 of other taxable income. They bought a rental for $700,000, took $200,000 of depreciation and sell for $1,000,000 net with no mortgage. Brackets come from Rev. Proc. 2025-32; state tax is excluded and would widen the gap. Run your own numbers with your CPA.

• Gain $500,000: $200,000 unrecaptured section 1250 gain and $300,000 other long-term gain.
• Depreciation layer from $200,000 to $400,000: $11,400 at 22% and $188,600 at 24% = $47,772.
• Capital gain from $400,000 to $700,000: $213,700 at 15% and $86,300 at 20% = $49,315.
• Net investment income tax: 3.8% of the $482,200 by which modified AGI exceeds $250,000 = $18,324.
• Federal tax $115,411; cash left $884,589. To buy a property of equal quality without new money, its price must be 11.5% lower than today, before counting the second purchase's closing costs and any income lost while in cash.

The basis reset is the real benefit of paying, but it pays back slowly

Buying with after-tax cash gives you a cost basis equal to the purchase price. Buying through an exchange gives you the old basis, so the same $1,000,000 property carries $500,000 of basis in the exchange and $1,000,000 if bought after a taxable sale.

Depreciation recovers that difference over time. Section 168(c) sets 27.5 years for residential rental buildings and 39 years for nonresidential. Hypothetically, if 80% of the extra $500,000 is building, that is $400,000 more to depreciate, about $14,545 a year on a residential schedule, worth roughly $3,491 a year at a 24% rate. Set that against $115,411 paid up front.

Cost segregation narrows the gap: section 168(k) as amended in 2025 allows 100% bonus depreciation on qualifying components acquired after January 19, 2025, so part of the fresh basis can be deducted in year one. Those deductions are later recaptured too; cost segregation and 1031 strategy works through the trade.

Time in cash has its own costs that the tax calculation leaves out

While you wait you give up rent, and interest on cash is ordinary income that also counts toward the 3.8% net investment income tax in section 1411. A second purchase means another set of acquisition costs, and the next seller may not cut the price just because you waited.

There is also no route back into deferral. Once proceeds reach your account the gain is recognized, and buying the same kind of property a year later does not undo it; too late to start a 1031 explains why.

If the concern is finding the right property inside 45 days rather than overall prices, a reverse exchange lets you buy first and sell second; see the reverse 1031 exchange guide.

Three questions settle it before you sign the listing agreement

Answer these with your CPA using your own tax figure, not the hypothetical one above. The answers usually point clearly one way, and the decision has to be made before closing because the proceeds must go to a qualified intermediary to keep the exchange open.

• How big is the tax as a share of your equity? That percentage is the price drop you need just to break even, so a small tax makes waiting a modest bet and a large one makes it a long shot.
• How long would you hold the next property? A long hold, or a hold until death, favours deferral; a short one favours paying while your bracket is known.
• Is the problem prices or the 45-day search? If it is the search, a reverse exchange or a DST placeholder solves it without paying any tax.
• Do you need part of the cash? A partial exchange keeps most of the deferral and taxes only what you take out; see what boot is in a 1031 exchange.

A DST is the middle path: keep the deferral now and choose the next property when it sells

A Delaware Statutory Trust interest qualifies as replacement property under Rev. Rul. 2004-86 and can close inside the exchange period, so you can complete the exchange without buying a property you would not otherwise choose. When the trust later sells its property, you can exchange again into whatever you want then; after a DST sells, the next 1031 covers that step.

The trade-off is control over timing. The sponsor decides when the trust sells, and DST interests are illiquid in between. Breakwater's cash out DST solutions are pitched at the same sell-now, buy-later problem; read how their liquidity works in the offering documents before relying on it.

If you expect to hold until death, the case for exchanging gets stronger, because section 1014 resets basis and the deferred gain is never taxed.