The short answer
You have three exits: sell and pay the tax, keep the rentals and hire management, or exchange them under section 1031 into property someone else runs, such as Delaware Statutory Trust interests. The exchange defers the gain and keeps the replacement in your estate, where section 1014 resets basis for your heirs at death. A sale gives you cash for care but can cost a large share of the gain. Medicaid eligibility is a separate state-law question that an exchange does not answer.
At a glance
| Deferral | Section 1031 defers gain when rental real property is exchanged for like-kind real property held for investment |
|---|---|
| Deadlines | Identify replacements by day 45 and close by day 180 after the sale |
| Heirs' basis | Section 1014 sets basis at fair market value at death, erasing the deferred gain |
| Durable power of attorney | Survives the principal's incapacity if it says so in writing |
| Medicaid look-back | 60 months for transfers for less than fair market value |
| Medical deduction | Care costs above 7.5% of AGI, including lodging when the main reason for the stay is medical care |
| DST management | Rev. Rul. 2004-86 bars the trustee from re-leasing, refinancing or reinvesting |
Decide what the rentals must do for you now: pay for care, pass to heirs, or both
The move changes the job the rentals do. Before it, they were a business you ran; after it, they are either a source of income for care bills or an inheritance you want to hand on intact. Most families want both, and the exit you choose should be judged against those two goals, not against the tax bill alone.
A sale turns the equity into cash you can spend on care, but federal tax comes out first. An exchange keeps the full equity invested and producing income, and keeps the deferred gain in a position where section 1014 can wipe it out at death under the step-up rule. Keeping the rentals with a property manager preserves the step-up too, but leaves you or your agent approving repairs, leases and evictions from a care facility.
If you are weighing whether to hold for the step-up rather than sell, 1031 vs holding for step-up runs that comparison in detail; this page covers the move itself.
Get the signing authority in place before the move, because the exchange has hard deadlines
An exchange needs signatures on the listing, the sale contract, the qualified intermediary agreement, the 45-day identification and the replacement purchase documents. Section 1031(a)(3) gives you 45 days to identify and 180 days to close, and neither deadline waits for a family to sort out who can sign.
A durable power of attorney is the usual tool. California Probate Code section 4124 defines one as a power that states it is not affected by the principal's later incapacity, or that it becomes effective on incapacity; other states use similar wording. Some acts need express authority: under section 4264, an agent can create or change a trust, make gifts or change survivorship interests only if the document says so.
If the rentals are already titled in your revocable living trust, the successor trustee can act when you cannot. Section 676 treats you as the owner of a trust you can revoke, so the trustee's sale and purchase count as your exchange for tax purposes, and the replacement can be titled to the same trust. Selling a parent's rental after a dementia diagnosis covers capacity questions in more depth.
Worked model: two rentals, $1,000,000 net, and what each exit leaves invested
Hypothetical round numbers. A widowed owner sells two rentals for $1,000,000 after selling costs. Adjusted basis is $300,000 after $200,000 of depreciation, so the gain is $700,000, and there is no mortgage.
At the maximum federal rates, a cash sale would cost about $176,600: 25% on the $200,000 depreciation layer, 20% on the remaining $500,000 and 3.8% net investment income tax on the full $700,000. Lower brackets, the size of other income and state tax all change that figure, so treat it as a ceiling, not a forecast, and run your own numbers with your CPA.
Exchanged in full, all $1,000,000 stays invested and the replacement carries the old $300,000 basis forward under section 1031(d). If the owner holds the replacement until death, section 1014 gives the heirs a basis equal to its value on the date of death, and the deferred $700,000 is never taxed. If care costs later force a sale, the deferred tax comes due then, so the exchange buys time and keeps the option open rather than eliminating the tax in every case.
Care costs, Medicaid and the former home follow their own rules
Assisted living and nursing care can create a large medical deduction. Publication 502 allows the cost of care in a nursing home, home for the aged or similar institution, including meals and lodging when a principal reason for being there is medical care, to the extent total medical expenses exceed 7.5% of adjusted gross income. In the year of a taxable sale, that deduction can absorb part of the income; ask your CPA to model both years.
Medicaid is not a tax rule. Under 42 U.S.C. 1396p(c), a state must impose a penalty period for assets given away for less than fair market value within a 60-month look-back before application. Selling or exchanging at market value is not a giveaway, but whether a DST interest or the rentals count as available resources depends on your state's rules, so an elder-law attorney should review any plan before you rely on it.
If you also sell the home you lived in, section 121(d)(7) treats time in a licensed care facility as residence use, as long as you are physically or mentally incapable of self-care and lived in the home for at least one year of the five before the sale. That is a separate exclusion from the rental exchange.
DST interests fit when the goal is income without management, and the trade-offs are control and liquidity
A DST owns the real estate and a sponsor-affiliated manager runs it, so there are no tenant calls, repairs or lease renewals for you or your agent. Rev. Rul. 2004-86 treats a properly limited DST interest as real property for an exchange, and the same ruling explains why the structure is passive: the trustee cannot sell and buy new property, renegotiate leases, refinance or make more than minor non-structural changes.
Those limits are also the main risks. Distributions depend on the property's performance and are not guaranteed; the interest is illiquid until the sponsor sells, which can take years; and you cannot step in if the tenant or market weakens. DST illiquidity and exits and transferring DSTs to heirs and trusts explain what happens at sale and at death.
Spreading the proceeds across several DSTs, and keeping enough outside cash for care, is the usual way to manage those risks. If you are helping a parent rather than planning your own move, elderly parent 1031 options works through the family side.
Related questions
Can my son sign the exchange documents for me after I move?
Yes, if he holds a durable power of attorney that covers real estate transactions, or is successor trustee of a revocable trust that owns the rentals. The exchange remains yours for tax purposes, so the replacement must be titled to you or to your revocable trust.
Will a DST pay enough to cover assisted living?
No one can promise that. Distributions vary by offering, depend on the property's results and can be reduced or suspended, so plan care costs around cash you control and treat DST income as a supplement.
Does exchanging the rentals help me qualify for Medicaid?
Not by itself. An exchange swaps one investment for another at market value, and whether the replacement counts as a resource is decided under your state's Medicaid rules, which an elder-law attorney should check.
What if I need part of the money now?
You can take some cash at closing and exchange the rest; the cash is taxable boot up to the amount of your gain. Leftover cash after a 1031 shows how that partial result is taxed.
What happens to the DST interests when I die?
They pass under your will or trust like other property, and section 1014 resets their basis to value at death. Your heirs then hold the interests until the sponsor sells, or exchange onward when it does.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 1031, Exchange of real property held for productive use or investment
- 26 U.S.C. section 1014, Basis of property acquired from a decedent
- 26 U.S.C. section 121, Exclusion of gain from sale of principal residence
- 26 U.S.C. section 676, Power to revoke
- 42 U.S.C. section 1396p, Liens, adjustments and recoveries, and transfers of assets
- IRS Publication 502, Medical and Dental Expenses
- California Probate Code section 4124, Durable power of attorney
- California Probate Code section 4264, Acts requiring express authority
- Rev. Rul. 2004-86, Delaware statutory trusts