How CPAs Can Help Retiring Landlords Evaluate Tax-Deferred Exit Strategies

A landlord tells her CPA she is ready to sell. She has owned the property for decades, the tax basis is low, and the thought of another tenant problem has lost its appeal. She wants the income to continue. She wants someone else to handle the property. She also wants access to money if her plans change.

The tax bill matters. What she owns the day after closing matters more.

A strategy can qualify for tax deferral and still leave a client with too much debt, too little liquidity or an investment that does not support her spending needs. For CPAs advising on appreciated real estate exits, the useful comparison starts with the client's life after the sale.

Start with the taxable sale

I would begin with an estimate of the after-tax proceeds. That gives every alternative a meaningful comparison. Ask what income those proceeds could support, how much cash the client needs available and how much real estate exposure she wants to retain.

Consider a hypothetical client who expects $1 million in net equity and needs $150,000 for spending outside the investment. A fully deferred exchange that commits all the equity may leave her short of accessible cash. A partial exchange, with tax recognized on the taxable portion, may better fit her needs. In a partial exchange, cash received, net debt relief and any other non-like-kind property are treated as boot, and gain is recognized to the extent of that boot, up to the amount of realized gain. The CPA should calculate the consequences, including the treatment of liabilities.

Paying some tax can be a deliberate planning decision.

A traditional exchange preserves real estate ownership

A 1031 exchange can defer gain when real property held for investment or for productive use in a trade or business is exchanged for other qualifying real property. In a typical deferred exchange, identification is due within 45 days. Acquisition generally must occur within 180 days or the tax-return due date, including extensions, if earlier.

Those deadlines make early planning valuable. They also create pressure to buy what is available.

Before the sale closes, ask whether the replacement property will reduce the client's workload. A professionally managed building can help, but the owner may still face leasing decisions, capital expenditures and refinancing. Deferring the gain does not necessarily solve the reason she wanted to sell.

A DST can remove management responsibilities

Delaware statutory trusts can allow investors to exchange into fractional interests in professionally managed real estate. Revenue Ruling 2004-86 establishes the tax treatment for a DST that meets the ruling's facts and requirements, so eligibility depends on how the trust is structured and whether those requirements are satisfied. Other Section 1031 requirements still apply.

This can let a retiring landlord retain real estate income potential without managing tenants or arranging repairs. Allocating across offerings may also reduce dependence on one property or market.

The investment review should address the property, sponsor, financing, reserves and total costs. Ask whether distributions are supported by operations and what happens when a loan matures. Ask how the advisor is compensated and whether selling commissions reduce the equity that goes into the property. A distribution rate alone does not describe the investment's return or risk.

The client gives up day-to-day control, and the holding should be treated as a multi-year commitment. In return, a professional sponsor manages the property on her behalf and she collects the income.

A later 721 transition changes the investment

Some DST programs contemplate a later contribution to a real estate investment trust's operating partnership through a 721 exchange. Section 721 generally provides nonrecognition for property contributed to a partnership in exchange for partnership interests, subject to exceptions and transaction-specific tax analysis.

Upon the UPREIT transition, the investor receives operating partnership units in a diversified portfolio. For a landlord who wants to leave the exchange cycle, this transition generally ends the ability to continue deferring gains through future Section 1031 exchanges, since the investor typically holds partnership units rather than direct real property. She no longer needs to find a replacement property every few years, and the program's terms can give her a path to capital when she needs it.

The eventual portfolio deserves attention before the initial DST purchase. Review its assets, leverage, fees, valuation process and redemption provisions. Ask who decides whether the transition occurs, how the contribution is valued and what happens if it never occurs.

The units are not exchange-traded REIT shares, and liquidity depends on the program's terms. Redemptions run through the REIT's redemption program, which should be reviewed before investing. Converting units to REIT shares or redeeming them for cash can trigger tax, and the units generally cannot be used in a subsequent Section 1031 exchange.

That is a different investment from the one she sold. It should be understood before she commits.

Opportunity funds require a separate comparison

A qualified opportunity fund is a different route under Section 1400Z-2. Unlike a 1031 exchange, which requires reinvesting the full sale proceeds to defer the full gain, only the gain needs to go into the fund, and the client can invest all of it or just a portion. She keeps her original basis in her pocket with no tax due on it, and any gain she does not reinvest is simply taxed. The rest of the proceeds are available for spending or diversification, subject to the applicable timing and qualification rules.

For qualifying investments made after December 31, 2026, eligible gain invested within 180 days of the sale is deferred until the earlier of an inclusion event or five years after the investment. At the five-year mark, basis increases by 10% of the deferred gain, or 30% for a qualified rural opportunity fund, so only the remainder is taxed. Investments made on or before December 31, 2026 are subject to the prior rules, including the December 31, 2026 deadline for recognizing remaining deferred gain.

A separate benefit applies to appreciation. After a ten-year holding period, gain on the fund investment itself can be excluded. Neither benefit establishes whether the fund is a suitable investment. Evaluate the underlying business or property strategy, development risk, fees and expected cash flow, and plan for the tax that comes due in year five while the fund remains illiquid.

In our practice, the fit usually depends on what is being sold. For appreciated real estate, a 1031 exchange is generally the preferred route because it can defer the full gain and the client can keep deferring. An opportunity fund tends to fit best when the gain comes from a stock or business sale, where a 1031 exchange is not available.

Put the alternatives on the same page

Before recommending a direction, compare each available strategy with the taxable sale. Show the client expected income after fees, debt exposure, accessible cash, likely holding period and who controls the exit. Ask whether the plan still works if distributions fall or the exit takes longer.

The CPA can establish the tax consequences and ownership constraints. The investment advisor can evaluate portfolio fit, sponsor risk and compensation. Both should understand the other side's assumptions before the client commits.

The landlord who walked into her CPA's office wanted three things: income that continues, someone else running the property, and access to her money if plans change. Each strategy here can deliver part of that. The right one is the one that fits her life after the sale, and tax deferral should serve that plan rather than drive it.

If a client's question goes beyond your day-to-day work with these structures, bring in a fee-only advisor who handles them daily, and do it before the property goes under contract. The deadlines start at closing. The best options are the ones chosen before then.

Sources

• IRS guidance on like-kind exchanges and taxable cash or other property received
• IRS Instructions for Form 8824 (Deferred Exchanges and qualifying real property)
• IRS Revenue Ruling 2004-86 (DST qualification under its stated facts)
• 26 USC Section 721 (nonrecognition and exceptions)
• SEC Investor.gov overview of REIT structures and non-traded REIT liquidity risks
• 26 USC Section 1400Z-2 (qualified opportunity fund investment rules)
• IRS Notice 2026-40 (rules for investments made after December 31, 2026)

About the author

Carl E. Sera, CMT

President and Managing Principal, Sera Capital Management

Carl E. Sera, CMT, is President and Managing Principal of Sera Capital Management, LLC, an Annapolis, Md.-based fee-only fiduciary investment advisory firm specializing in 1031 exchanges, Delaware statutory trusts and 721 UPREIT strategies. He works with real estate owners and their advisors on transitions from active property management to passive investments.