Three Futures for Your Equity: Hold, Sell and Pay, or Exchange, Modeled Over 10 Years

Three futures, one worksheet: what each path does with the same $1,500,000

Hold keeps the rental. Sell and pay takes the after-tax cash and invests it elsewhere. Exchange moves the full $1,500,000 into replacement real estate under section 1031, carrying the old basis forward. The worksheet follows each path for ten years and then asks two questions: what is left if you sell in year 10, and what do your heirs receive if you die holding.

The point is not a forecast. It is to see which assumptions move the answer, so the conversation with your CPA starts from the inputs that matter. The keep-vs-sell tax model builds the year-one comparison in more detail; this page stretches it over a decade.

The assumptions, stated so you can replace them

Every figure is hypothetical and round. Real properties, rates and returns will differ, and nothing here is a projection of any investment's performance.

• Property worth $1,500,000 net of selling costs, adjusted basis $500,000, of which $400,000 of reduction came from depreciation; no mortgage.
• Tax on a sale: depreciation layer at the 25% ceiling of section 1(h), other gain at 20%, plus 3.8% under section 1411, plus a flat 5% state tax. Today that is $308,000, leaving $1,192,000.
• Every path earns the same hypothetical 5% a year of net income on the capital it starts with, spent each year, and the same 3% a year of appreciation.
• Further depreciation and the tax on annual income are left out of all three paths to keep the comparison on the sale itself.
• Sell and pay invests in an asset with no depreciation, so its later gain is taxed at 23.8% plus 5% state.

Year 10 with a sale: hold and exchange finish about $229,000 ahead of sell-and-pay

At 3% a year, $1,500,000 grows to about $2,015,900, and $1,192,000 grows to about $1,601,900. The hold and exchange paths then pay tax on a $1,515,900 gain, and the sell-and-pay path pays tax only on its $409,900 of new growth.

The gap is the return on the tax you did not pay in year one: $308,000 earning income and appreciating for a decade, less the tax due on that growth at the end. Run your own numbers with your CPA.

• Hold or exchange: tax at sale about $456,600, after-tax proceeds about $1,559,300, plus $750,000 of income over ten years: about $2,309,300.
• Sell and pay: tax at the second sale about $118,100, after-tax proceeds about $1,483,900, plus $596,000 of income: about $2,079,900.
• Difference: about $229,400 in favour of deferral.

Year 10 at death: the basis reset erases the deferred gain, and the gap more than doubles

Section 1014(a)(1) gives an heir a basis equal to the property's fair market value at the date of death. The $1,515,900 of gain inside the hold or exchange path is never taxed as income; the heirs could sell at $2,015,900 and owe nothing on it. The sell-and-pay heirs inherit $1,601,900 with a stepped-up basis too, but that family already paid $308,000 in year one.

Adding ten years of income, the hold or exchange family is ahead by about $568,000. Estate tax does not change that comparison for most owners: Rev. Proc. 2025-32 sets the 2026 basic exclusion at $15,000,000 per person. Our 1031 versus holding for the step-up guide and DSTs in estate planning cover what heirs inherit in each structure.

Sensitivity: growth and future tax rates change the size of the gap

The deferral advantage in this model does not depend on appreciation. Even with none, the $308,000 of unpaid tax earns $15,400 a year at 5%, which is the $154,000 gap at a year-10 sale. Faster growth widens it, because more value compounds on the larger base; slower growth or a loss narrows it, and a fall in value hurts the larger pool more in dollars.

The model also assumes nothing forces a sale before year 10. A replacement you must sell early, or a DST that sells on its sponsor's schedule, brings the deferred tax forward unless you exchange again, and a second exchange restarts the 45-day and 180-day clocks. Test the plan against an early exit, not only against the base case.

• 0% growth: year-10 sale gap about $154,000; at death about $462,000.
• 3% growth: about $229,400 at a sale; about $567,900 at death.
• 5% growth: about $291,900 at a sale; about $655,700 at death.
• Rates 5 points higher on capital gain at the year-10 sale, 3% growth: the hold or exchange tax rises about $55,800 and the sell-and-pay tax about $20,500, so the gap narrows to about $194,100.

Hold versus exchange: the tax model ties them, so decide on everything the model leaves out

Holding and exchanging produce the same numbers here because both keep the full $1,500,000 invested with the same basis. What separates them is everything else: whether you still want to manage tenants, whether one building in one market is too much of your net worth, whether the property needs capital you do not want to spend, and whether you want debt.

An exchange into traditional DST interests trades management and concentration for illiquidity, sponsor fees and no control over when the property sells; distributions are not guaranteed and the value can fall. A direct replacement keeps control and the work. How much tax you would pay without a 1031 shows how to replace this page's flat 25% and 20% with your actual brackets.