Selling a rental property? Don’t let the IRS take 25% (or more) of your hard-earned profit.

If you are a landlord looking to sell, you might be staring at a tax bill that feels more like a penalty than a contribution. Between Federal Capital Gains, the Net Investment Income Tax (NIIT), and the often-overlooked Depreciation Recapture, it is not uncommon for investors to lose 20% to 30% of their equity to taxes upon sale.

Many real estate agents will tell you a 1031 Exchange is your only option. They are wrong.

In this 2026 guide, we go beyond the basic “swap” strategies. We will break down 9 legal tax-saving strategies—including mathematical examples and “exit ramp” options like Installment Sales that are perfect for tired landlords who want to retire, not just trade one tenant headache for another.

Understanding the Tax Bite: What Are You Actually Paying?

Before you can save money, you need to know exactly how the IRS calculates your bill. It’s not just one tax; it’s a “stack” of three different taxes that hit your profit simultaneously.

• Federal Capital Gains Tax: This is based on your taxable income. For most investors in 2026, this will be 15% or 20%.
• Net Investment Income Tax (NIIT): A surtax of 3.8% applies if your Modified Adjusted Gross Income (MAGI) exceeds $200,000 (Single) or $250,000 (Married Filing Jointly).
• Depreciation Recapture: This is the silent killer. The IRS “recaptures” the depreciation you claimed (or could have claimed) over the years and taxes it at a flat 25%—regardless of your income bracket.

2026 Capital Gains Tax Brackets (Long-Term)

Note: Short-term gains (assets held <1 year) are taxed as ordinary income, which can go as high as 39.6%.

Strategy 1: The 1031 Exchange (The Heavy Hitter)

The most popular way to defer taxes is the “Like-Kind” Exchange (Section 1031). It allows you to roll all your profit into a new investment property, deferring the tax indefinitely.

The “We Buy Houses” Advantage
In a traditional market, closing in 180 days can be risky if financing falls through. Selling to a cash buyer (like us) or buying from one can offer the speed and certainty needed to hit these tight 1031 deadlines.

Pro Tip: Look into a “Reverse 1031” if you find the perfect deal before selling your old one, or a “Partial 1031” if you want to keep some cash (known as “boot”) and pay tax only on that portion.

Strategy 2: Section 121 Exclusion (Converting to Primary Residence)

If you aren’t in a rush, you can convert your rental into your home. Section 121 allows you to exclude up to $250,000 (single) or $500,000 (married) of gain if you own and live in the property for 2 of the last 5 years.

Strategy 3: Installment Sales (The “Retire Rich” Method)

This is often the best strategy for tired landlords.
Instead of receiving a lump sum (and a huge tax bill), you act as the bank. You sell the property to a buyer (like 123webuyhouses.com) and receive monthly payments over time.

Why It Wins:

1. Tax Deferral: You only pay capital gains tax on the principal portion of each payment you receive that year.
2. Lower Bracket: Spreading income over 10-20 years might keep you in the 15% (or even 0%) tax bracket rather than bumping you to 20%.
3. Interest Income: You earn interest on the balance, often at rates higher than a savings account.

Strategy 4: Tax-Loss Harvesting (Offsetting Gains)

Did you lose money in the stock market or crypto this year? You can use those losses to offset your real estate capital gains dollar-for-dollar.

Unlock “Suspended Passive Losses”
If you have a rental that consistently lost money on paper (due to depreciation), you likely have “suspended passive losses” tailored up. When you finally sell that property to an unrelated party, all those suspended losses unlock immediately. This can massively reduce your taxable gain.

Strategy 5: Opportunity Zones (The 2026 Deadline)

Created by the Tax Cuts and Jobs Act, Qualified Opportunity Zones (QOZs) allow you to roll your capital gains into a specialized fund that invests in distressed communities.

• Deferral: Taxes on your original gain are deferred until December 31, 2026 (or until you sell the fund, whichever comes first).
• Tax-Free Growth: If you hold the QOZ investment for 10+ years, any appreciation on that new investment is 100% tax-free.

Strategy 6: The “Lazy” 1031 (Delaware Statutory Trust – DST)

Love the idea of tax deferral but hate the idea of toilets, tenants, and termites? A Delaware Statutory Trust (DST) might be for you.

A DST allows you to use 1031 exchange funds to buy a fractional share of a massive, institutional-grade property (like a luxury apartment complex or medical building). You become a passive owner, collecting checks without doing any work.

Strategy 7: Self-Directed IRA / 401(k)

If you buy rental property using a Self-Directed IRA or Solo 401(k), the gains are shielded from immediate taxes.

• Traditional IRA: Tax-deferred until you withdraw in retirement.
• Roth IRA: 100% Tax-Free forever (if rules are met).

Warning: Watch out for UBIT (Unrelated Business Income Tax) if you use leverage (loans) inside an IRA. Also, you generally cannot live in the property or do the repairs yourself (“sweat equity” is a prohibited transaction).

Strategy 8: Charitable Remainder Trusts (CRT)

For high-net-worth investors with highly appreciated assets, a CRT is a powerful tool.

1. You transfer the property to the Trust.
2. The Trust sells the property tax-free (no capital gains).
3. The Trust pays you a steady income stream for life (or a set term).
4. The remainder goes to a charity of your choice when you pass.

Bonus: You get an immediate income tax deduction for the charitable contribution portion.

Strategy 9: Step-Up in Basis (The Inheritance Strategy)

It’s a bit morbid, but it’s the most effective tax strategy in the code. If you hold a property until you pass away, your heirs receive a “Step-Up in Basis.”

Note: This is why many families choose to hold properties and only sell after probate.

Summary: Which Strategy is Best for You?

FAQs About Selling Rental Property

Q: Can I avoid capital gains tax if I buy another house without doing a 1031 Exchange?
A: No. Simply using the money to buy another house does not defer the tax. You must use a Qualified Intermediary and follow the strict 1031 rules before you touch the cash.

Q: What happens to my depreciation when I sell?
A: You will owe “Depreciation Recapture” tax at a flat rate of 25% on the total amount of depreciation you claimed (or were allowed to claim) during your ownership.

Q: Can I sell to a “We Buy Houses” company and still do a 1031 Exchange?
A: Absolutely. In fact, it’s often safer. Since cash buyers close quickly and reliably, you eliminate the risk of a traditional buyer’s financing falling through at the last minute, which could cause you to miss your 1031 deadlines.

Conclusion: Don’t DIY Your Taxes

Selling a rental property involves complex tax codes that change annually. While a 1031 exchange is great, strategies like Installment Sales or Tax-Loss Harvesting might actually put more money in your pocket depending on your goals.

Are you a tired landlord looking for a clean exit?
At 123webuyhouses.com, we specialize in flexible buying solutions. Whether you want a fast cash sale to hit a 1031 deadline, or an Installment Sale to defer taxes and create retirement income, we can structure a deal that fits your needs.

Disclaimer: We are real estate investors, not CPAs or Tax Attorneys. This guide is for informational purposes only. Every financial situation is unique. Always consult a qualified tax professional before making decisions about selling your property.

This video provides a professional breakdown of 2026 tax brackets and the “stacking” system of ordinary income vs. long-term capital gains, helping you visualize the impact on your real estate profits.