Need Income After a Job Loss? Selling a Rental Without Handing Too Much to Tax

The year you lose a job can be the cheapest year to sell, because the gain fills low brackets first

Capital gains are taxed according to where they land in your taxable income. For 2026, Rev. Proc. 2025-32 keeps long-term gain at 0% up to $98,900 of taxable income on a joint return and $49,450 for a single filer, and at 15% up to $613,700 joint and $545,500 single. In a year with a full salary, most of a rental gain lands in the 15% band or higher; in a year without one, much of it can land at zero.

The depreciation portion follows different rules. Unrecaptured section 1250 gain is taxed at your ordinary rates with a 25% ceiling under section 1(h)(1)(E), so in a low-income year it may be taxed at 10% or 12% rather than 25%.

Severance and unemployment benefits still count. Section 85 includes unemployment compensation in gross income, so add those amounts before estimating how much of the band is left. Low-bracket harvesting vs deferral covers the zero-rate band in more depth.

Hypothetical: the same $150,000 gain costs about $12,600 in a jobless year and about $32,700 in a working year

Hypothetical: a married couple filing jointly sells a rental for a $150,000 long-term gain, of which $50,000 is unrecaptured section 1250 gain from depreciation. Compare a year with $30,000 of severance and unemployment against a year with $250,000 of wages, using the 2026 brackets and the $32,200 standard deduction.

Run your own numbers with your CPA; state income tax, itemized deductions and any other income all change the result.

• Jobless year: taxable income is $147,800. The deduction covers the $30,000 of other income and $2,200 of the depreciation gain; the other $47,800 of depreciation gain is taxed at 10% and 12%, about $5,240. Of the $100,000 remaining gain, $51,100 falls at 0% and $48,900 at 15%, about $7,335. Total about $12,575, and no net investment income tax because income is under $250,000.
• Working year: ordinary taxable income of $217,800 pushes the $50,000 of depreciation gain into the 24% bracket, about $12,000, and the other $100,000 is taxed at 15%, $15,000. Income of $400,000 exceeds the $250,000 threshold by $150,000, so the 3.8% tax under section 1411 adds $5,700. Total about $32,700.
• The difference, about $20,000 on this one sale, is the value of timing the sale into the low year.

If you need monthly income rather than a lump sum, exchange into property that pays it

A low-bracket sale converts the rental into cash, and you still need to turn that cash into income. If what you need is replacement cash flow without the work of a tenant, a full exchange into income-producing property defers the whole gain and keeps the equity working.

DST interests are the common hands-off choice. Under Rev. Rul. 2004-86 investors own interests in the trust's real estate and the trustee runs it; distributions come from the property's net income and are not guaranteed, they can be reduced or suspended if tenants fail, and the interest cannot be sold quickly if you need the principal, as DST illiquidity explains. Read the traditional DST overview for how income offerings are structured.

Avoid one mismatch: a zero cash flow DST is built so that rent services the trust's debt, and investors receive no current distributions. It can solve a debt-replacement problem, but it does nothing for a household that needs monthly income.

A partial exchange takes cash for the gap and defers the rest, but the cash must come out at the right moment

Section 1031(b) taxes cash or other boot you receive, up to the amount of your gain, and defers the remainder. Taking $100,000 of a sale in cash and exchanging the rest can cover a period without wages while the bulk of the equity stays tax-deferred.

Timing matters. Under Reg. section 1.1031(k)-1(g)(6), once proceeds reach the qualified intermediary you generally cannot receive them until the exchange ends, except after day 45 if nothing was identified, or after you have acquired everything you identified. Cash you need right away should be paid to you at the sale closing instead.

Which layer the boot is taxed as, depreciation or ordinary capital gain, is a reporting question covered in how boot is taxed. In a low-income year the boot itself may fall partly in the 0% band, which can make a partial exchange the best of both routes.

Decide with three numbers: the tax this year, the income you need, and how long until wages return

Start with the tax on a full sale this year, using your actual severance, unemployment and any other income. Then estimate the monthly income you need from this equity and for how long. If a new job is likely within months, a sale in the low year and a cash cushion may be enough; if not, deferral into income-paying property keeps more capital working.

Compare the three routes side by side on the same page: a full sale this year with its tax, a full exchange with its expected but variable distributions, and a partial exchange with its smaller tax and its cash. Seeing them together usually makes the choice obvious, and it is the conversation to have with your CPA before you sign a listing agreement. Sell or exchange: the numbers shows how to lay out that comparison.

Keep a reserve outside any illiquid investment. DST interests and net-leased property are long-term holdings, and a household between jobs needs money it can reach.