Tax Implications of Selling a Rental Property

Image from


Are you thinking about selling a commercial or rental property? Did you know there are ways to avoid paying capital gains on your profits?

Many real estate investors and business owners aren’t aware of this and end up paying unnecessary taxes. So I’m going to share with you a couple of ways to save:

  • Do a Section 1031 Like-Kind Exchange – With this exchange, you take the proceeds earned from selling your original property and invest them in another similar property. This defers the taxes until you sell the property and retain the cash.
  • Use a qualified opportunity zone fund – If you take the funds earned and invest them in a company that combines money from other investors to invest in qualified opportunity zones designated by the government, you can defer your capital gains taxes.

Which is right for you?

It depends on what you want with the funds.

A qualified opportunity fund only defers your capital gains taxes until 2026. So if you’re just looking to invest in something short-term and then to get out of the investment, the opportunity fund is your better option.

However, if this is a long-term investment, one that you might hang onto and pass onto your estate, the 1031 exchange is better. When your heirs receive the property, they’ll receive it on a stepped-up basis or the value on the day you die. This decreases the capital gains they earn in the eyes of the IRS, limiting their tax liabilities too.

However, if you sell the 1031 property early, you’ll pay taxes on the amount earned from the original property’s sales price and the new property’s sale amount. Plus, you keep yourself on the hook for maintaining and paying for the property as long as you own it.

The qualified opportunity fund, however, offers more liquidity. You only need to invest the capital gains, not the entire amount, giving you opportunities to use the funds in other ways.

There are pros and cons to each option. Consider which suits your needs the most, and contact us today if you need help deciding.