Selling Your Rental Portfolio to Retire: How Much to 1031 and How Much Tax to Pay

Selling all six buildings in one year: the $370,000 federal stack on a $1,500,000 gain

Assume a hypothetical couple, both 67, with six rentals worth $6,000,000 net of selling costs, $1,000,000 of mortgages, $5,000,000 of equity, $500,000 of depreciation taken and $1,000,000 of appreciation, plus $60,000 of Social Security and pension income. After the 2026 standard deduction of $32,200 and $1,650 for each spouse over 65, ordinary taxable income is $24,500 before the sale.

The $500,000 of unrecaptured §1250 gain is taxed at up to 25% under Topic 409, or $125,000. The $1,000,000 of capital gain stacks on top from $524,500 to $1,524,500 of taxable income; Rev. Proc. 2025-32 ends the 15% band at $613,700, so $89,200 is taxed at 15% ($13,380) and $910,800 at 20% ($182,160).

Net investment income tax applies to the lesser of the gain or MAGI over $250,000, here $1,310,000, adding $49,780 per the IRS NIIT questions and answers. The federal total is about $370,300; a hypothetical 5% state adds $75,000, leaving about $4,555,000 to invest.

• Income test: $4,555,000 at a hypothetical 4% withdrawal is $182,200, plus $60,000 of pensions, or $242,200 against a $240,000 spending target.
• Medicare test: the 2026 CMS premium notice charges $689.90 per person per month at joint MAGI of $750,000 or more, versus the $202.90 standard, so the sale year costs about $11,700 in Part B premiums two years later, before Part D surcharges.
• Senior deduction test: the $6,000 per-person deduction for 2025 through 2028 phases out above $150,000 of joint MAGI, so the sale year forfeits $12,000 of deductions.

Exchanging all $5,000,000 into DSTs and net leases: full deferral, but the income is real estate income

A complete exchange moves the whole $5,000,000 of equity into passive replacements and replaces the $1,000,000 of debt with non-recourse loans inside the trusts, deferring the entire $370,300 federal bill. At a hypothetical 5% distribution rate the portfolio produces $250,000 a year, and part of that is sheltered by depreciation on the carried-over basis.

The costs are structural rather than tax. The Silverman outline puts DST up-front fees at 10 to 18 percent of equity and DST terms at five to ten years, so $500,000 to $900,000 of the equity is absorbed by fees and reserves and the money is not available for a decade-long emergency.

That is fine for a retiree whose other assets cover surprises and whose heirs will inherit the trusts at a stepped-up basis; the DST estate planning page covers that path. It is a poor fit if the portfolio is your only liquidity, which is the case for more landlords than admit it.

The hybrid: pay tax on the four high-basis buildings, exchange the two low-basis ones

Sort the six by gain. Suppose two buildings hold $1,200,000 of the gain on $2,000,000 of equity and the other four hold only $300,000 of gain on $3,000,000 of equity. Selling the four taxably costs $25,000 of recapture on $100,000, $30,000 of 15% tax on $200,000 of capital gain and $4,180 of NIIT (MAGI $360,000 less $250,000, times 3.8%), about $59,200 federal or $74,000 with the hypothetical 5% state.

The two low-basis buildings go through a 1031 into DSTs or a net-leased property, deferring about $300,000 of tax that would otherwise fall mostly in the 20% band. The couple ends up with about $2,926,000 liquid and $2,000,000 of passive real estate, and a hypothetical 4% and 5% draw on those produces $217,000 plus $60,000 of pensions.

The hybrid also keeps the sale year's MAGI near $360,000, which lands in the $342,000 to $410,000 IRMAA tier ($527.50 a month) rather than the top tier, and splitting the four sales across two calendar years drops MAGI below the $218,000 first tier entirely. Your CPA or attorney should model the actual brackets, state rules and Medicare effects before you sign a listing agreement.

One sale a year holds you in the 15% band, under NIIT and below the first IRMAA tier

Bracket management works only for buildings with modest gains. With $60,000 of other income, a couple can realize about $158,000 of gain in a year and keep MAGI at the $218,000 IRMAA line, or about $190,000 and stay under the $250,000 NIIT threshold, which under Topic 559 is not indexed and will not move.

The 0% capital-gain band is smaller than it looks. Taxable income must stay at or below $98,900, and with $24,500 of ordinary income already there that leaves about $74,000 of capital gain at 0%; the recapture portion never qualifies because unrecaptured §1250 gain is taxed at ordinary rates capped at 25%.

Owner financing does not rescue the recapture either: Publication 537 requires the recapture income to be reported in the year of sale whether or not a payment was received. A staged sell-down is therefore a capital-gain tool, and the installment-sale comparison shows where a carried note still helps.

• Year 1: sell the building with the smallest gain, target MAGI under $218,000.
• Year 2: sell the next, or exchange it if its gain alone would breach $250,000.
• Every year: file a Form 8824 for each exchange, and keep the identification letters with the return.

If the children are the plan, the unrealized gain dies with you and the math flips

Under §1014(a)(1) a decedent's property passes to heirs at its date-of-death value, and the same Rev. Proc. 2025-32 fixes the estate exclusion for 2026 at $15,000,000. For a couple who will not outspend $5,000,000, every dollar of tax paid on a voluntary sale is a dollar the estate never needed to pay.

That argues for exchanging the low-basis buildings even if you never need their income, and for holding the DST interests until death rather than cashing them out at the sponsor's sale. The swap-till-you-drop guide shows how each DST sale can roll into the next exchange until the step-up arrives.

The counter-case is a couple in their early sixties who need the money to live on for thirty years and have no wish to leave real estate to anyone; for them the taxable sale of the high-basis buildings plus a hybrid exchange of the rest is usually the honest answer.

Line up the QI, CPA and replacement list before the first listing goes live

Every exchange starts a separate 45-day and 180-day clock under §1031(a)(3), and once a sale closes the proceeds sit with the qualified intermediary where Reg. §1.1031(k)-1(g)(6) bars you from touching them. The order of work below keeps a six-building sell-down from becoming six emergencies.

• Ask your CPA for adjusted basis, depreciation taken and suspended losses on each building, then rank them by gain.
• Decide the sell-taxably list and the exchange list, and the calendar years each sale belongs in.
• Engage a qualified intermediary before the first purchase contract is signed, not at closing.
• Pre-screen DST and net-lease replacements for the exchange buildings so identification is a formality by day 45.
• Confirm the exchange cooperation language in each sale contract and that proceeds wire to the QI, never to you.