Guide — Updated January 2026
You just sold a property. Here's how to keep the IRS from taking a third of your profit.
If you recently sold (or are about to sell) an investment property, there's a good chance you're about to owe a lot more in taxes than you expected. Capital gains, depreciation recapture, state taxes - it adds up fast. But there's a legal way to defer all of it. It's been in the tax code since 1921, Congress just confirmed it again in 2025, and most property owners still don't fully understand how it works.
How much are we actually talking about?
Most property owners are surprised by the real number. It's not just the capital gains rate - it's the stack of taxes that hit you all at once.
On a typical $1.2 million sale
$187,400
That's the combined hit from four separate taxes. With a 1031 exchange, that number becomes $0.
Here's how that $187,400 breaks down:
| Tax type | Rate | Amount |
|---|---|---|
| Federal capital gains | 20% | $82,500 |
| Depreciation recapture | 25% | $45,500 |
| Net investment income tax | 3.8% | $20,900 |
| State tax (estimated) | Varies | $38,500 |
| Total tax if you just sell | $187,400 |
Based on a $1.2M sale, $650K original purchase, California. Your numbers will vary.
The exact amount depends on your purchase price, how long you held the property, your depreciation, your income bracket, and your state. But the pattern is consistent: sellers lose 25-40% of their gain to taxes unless they plan ahead.
What you actually keep
Same $1.2M sale - two different outcomes
The compounding effect
How your money grows at 6% annual return
| After tax ($313K) | 1031 exchange ($752K) | You lose | |
|---|---|---|---|
| Year 5 | $419K | $1.01M | $587K |
| Year 10 | $561K | $1.35M | $786K |
| Year 20 | $1.00M | $2.41M | $1.41M |
By year 20, the investor who exchanged has $1.4 million more than the one who paid tax. That's the real cost of not planning ahead.
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What is a 1031 exchange, in plain English?
A 1031 exchange (named after Section 1031 of the tax code) is simple in concept: instead of paying tax on the profit from your sale, you reinvest that money into another property. As long as you follow the rules, the IRS lets you defer the entire tax bill.
The key word is "defer" - you're not avoiding the tax, you're postponing it. But here's where it gets interesting: you can keep deferring indefinitely, exchange after exchange. And when you eventually pass away, your heirs receive the property with a stepped-up basis - meaning the deferred tax effectively disappears.
This isn't a loophole or a gray area. It's been law since 1921. Congress specifically preserved it in the 2025 tax legislation with no cap and no new limits.
The catch: strict deadlines
A 1031 exchange isn't complicated, but it is time-sensitive. There are two deadlines that cannot be extended for any reason:
The 1031 exchange timeline
You sell
Proceeds go to a Qualified Intermediary
Identify
Tell your QI which property you'll buy
Close
Complete the purchase. Tax deferred.
You sell
Proceeds go to a Qualified Intermediary
Identify
Tell your QI which property you'll buy
Close
Complete the purchase. Tax deferred.
These deadlines are firm. No extensions, no exceptions. That's why planning ahead matters.
Your three replacement options
This is where most people get confused, because they assume "1031 exchange" means buying another rental property. It doesn't. You actually have three choices:
1. Buy another property yourself
The traditional route. You find another investment property, buy it, own it, manage it. Full control, but you need to find something within 45 days and close within 180. And you're back to being a landlord.
2. DST - Delaware Statutory Trust
Instead of buying a property yourself, you invest your proceeds into a trust that already owns institutional-grade real estate - apartment complexes, medical offices, warehouses. A professional sponsor handles everything. You receive passive monthly income. No tenants, no management. Most DSTs close in 3-5 business days. Target yields typically range from 5-7% annually.
3. TIC - Tenants in Common
You co-own a property with a small group of investors. You get a real deed, you can refinance your share independently, and you have a say in major decisions. More involved than a DST, but more control.
Michael R., a property owner in Texas, faced this exact decision last year after selling a $1.2M rental. He chose a DST, closed in four days, and now receives monthly income without managing anything. "I was ready to write a $187,000 check to the IRS," he says. "Instead I kept every dollar working. I wish I'd understood this option five years earlier."
Michael R. - Texas, $1.2M sale, deferred $187K via DST
Here's how the three options compare:
| Direct purchase | DST | TIC | |
|---|---|---|---|
| Your involvement | You manage everything | Fully passive | Mostly passive |
| Time to close | Weeks to months | 3-5 business days | Weeks |
| Control level | Full control | None (sponsor manages) | Partial |
| Monthly income | You collect rent | Distributed to you | Distributed to you |
| Tenant headaches | Yes | Zero | Minimal |
| Target yield | Varies widely | 5-7% annually | Varies |
| Best for | Hands-on investors | Passive income seekers | Balance of both |
David L. owned rentals in California for 15 years before deciding he was done. "The midnight calls, the vacancies, the contractors - I was exhausted," he says. He exchanged into a DST and hasn't managed a property since. "I still get monthly income. I just don't get the headaches anymore."
David L. - California, retired from landlording via DST
Common questions people ask at this point
Is this actually legal?
Yes. Section 1031 has been in the tax code for over 100 years. Congress explicitly preserved it in the 2025 tax legislation with no cap and no new limits.
What if I already sold and didn't plan for this?
If you're still within 45 days of closing, you likely have time - especially with a DST, which can close in days. It's worth checking.
What does this cost?
A Qualified Intermediary typically charges $750-$1,500. Compare that to a six-figure tax bill. The math is straightforward.
Can I just pay the tax and move on?
Of course. Sometimes that's the right call. But most people who see the actual number decide it's worth a conversation.
So what should you actually do?
If you've read this far, you probably fall into one of two categories: you've already sold and need to move fast, or you're planning to sell and want to understand your options before you do.
Either way, the smartest next step is the same: talk to someone who does this every day. Not a blog post. Not a YouTube video. An actual person who can look at your specific numbers and tell you what makes sense.
There's a specialist named Simon Brower who does exactly this - and the conversation is free.
Simon Brower
1031 Exchange Specialist
Simon has been in the 1031 and DST industry since 2004. He's helped place over $1 billion in exchanges across thousands of investors. He holds FINRA Series 7, 24, and 63 licenses. Previously held leadership roles at KBS and Grubb & Ellis.
Typically replies within 2 hours
Here's what the call actually looks like:
He asks about your property, your timeline, and what you're trying to accomplish
He explains which of the three options makes the most sense for your situation
You leave with a clear plan - or the honest answer that 1031 isn't right for you
No sales pitch. No follow-up calls unless you ask. If it's not right for you, he'll say so.
It takes about five minutes. Most people say it was the most useful conversation they had during their entire sale process.
This is a six-figure decision. One call. Five minutes. Free.
Leave your name and number - Simon will call you back:
Free. No spam. No obligation. He replies within 2 hours.
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