When to Time a Sale Around Your Retirement Income Year

The decision: recognize the gain in a year when other income is low, or defer it entirely

Retirement usually opens a window of low-income years between the last paycheck and required distributions or a full pension. A rental gain can use that window or wreck it. The question is not only which year has the lowest bracket, but which year's income will also be read by Social Security taxation, the net investment income tax and Medicare.

A full 1031 exchange removes the gain from every one of those calculations. A taxable sale puts all of it into one year. A partial exchange sits between them: under section 1031(b), gain is recognized only up to the money and other boot you receive, so you can decide how much lands in the year of sale. Whether retiring is the moment to stop owning property at all is the subject of retire and sell or 1031.

Four things your sale-year income moves at once

Each of these uses a slightly different income measure, but a recognized real estate gain raises all of them. Run your own numbers with your CPA, because the thresholds interact.

• Bracket placement. Rev. Proc. 2025-32 sets the 2026 0% capital gains rate up to $98,900 of taxable income for joint filers and the 15% rate up to $613,700. Unrecaptured section 1250 gain, the depreciation layer, is taxed at ordinary rates capped at 25% under section 1(h) and fills the low brackets before the rest of the gain.
• Social Security. Under section 86, joint filers whose income plus half their benefits exceeds $32,000 include up to 50% of benefits, and above $44,000 up to 85%. IRS Publication 915 has the worksheet.
• Net investment income tax. Section 1411 adds 3.8% on the lesser of net investment income or modified adjusted gross income above $250,000 for joint returns.
• Medicare premiums. The SSA's IRMAA tables set 2026 Part B and drug premiums from 2024 income. For a joint return, income over $218,000 and up to $274,000 raises Part B to $284.10 a month per person; over $342,000 and up to $410,000, to $527.50, against the standard $202.90.

Worked model: three ways to handle a $300,000 gain in the first retirement year

Hypothetical round numbers for 2026. A married couple, both 66, receive $50,000 of Social Security and a $20,000 pension. They sell a rental with a $300,000 gain, $100,000 of it from depreciation. The 2026 tables are used to show the effect; the thresholds that will apply to 2028 premiums will be adjusted.

Taxable sale: adjusted gross income is about $362,500, including $42,500 of Social Security made taxable by the gain. That is $112,500 above the NIIT threshold, about $4,275 of NIIT, and it places 2028 Medicare premiums in the $527.50 Part B tier, roughly $7,800 a year more for the two of them than the standard premium, before the drug surcharge.

Partial exchange taking $100,000 of boot: adjusted gross income is about $162,500. Benefits are still 85% taxable, but there is no NIIT and premiums stay at the standard rate. The other $200,000 of gain stays deferred.

Full exchange: only $6,850 of benefits is taxable, so adjusted gross income is about $26,850 and the whole $300,000 stays deferred. Run your own numbers with your CPA; deductions, state tax and the character of the boot all change the result.

Sizing a partial exchange: take only the boot your income can absorb

Work backward from the threshold you want to stay under. In the model, the couple's other income is about $62,500 once benefits are 85% taxable, so they have about $155,000 of room before the $218,000 Medicare tier and about $187,500 before NIIT. Boot of $100,000 leaves margin for interest and dividends.

Boot is not taxed at a single rate. Whether it is treated first as depreciation recapture or capital gain affects how much of it can fall in the 0% or 15% bands; see whether boot is taxed as recapture or capital gain first and the intentional boot strategy guide.

The deferred portion still has to produce what retirees need, which is usually income without management. Traditional DST distributions are not guaranteed and DST interests are illiquid; pairing DST income with Social Security covers how that income fits alongside benefits.

Roth conversions and the sale compete for the same low-income years

A conversion from a traditional IRA is included in income in the year you convert, IRS Publication 590-A explains, so it raises the same measures a real estate gain does. Doing both in one year stacks them: the gain and the conversion together can push benefits to 85% taxable and premiums up a tier.

A full or near-full exchange in the first retirement year can leave that year's low income available for a planned conversion, and a taxable sale can wait for a year with no conversion. The $6,000 per-person senior deduction for 2025 through 2028, which the IRS describes as phasing out above $150,000 of modified adjusted gross income for joint filers, is one more reason to keep a planned year's income modest.