Buy, Borrow, Die at 7%: 1031 Loans vs 721 Slices

The two plans, in one paragraph each

Buy, borrow, die. You 1031 into real property, keep it, and when you need money you borrow against the equity instead of selling. The loan is not income, so no deferred gain comes due. If you hold until death, heirs generally take a basis equal to fair market value (IRC 1014), the loan is repaid from the property, and the gain is gone.

Slices. You contribute the property to an operating partnership under Section 721 and redeem a little of the units each year. Each redemption is a taxable sale of part of the units (IRC 741). You keep the gain small enough to sit in the 0% and 15% long-term brackets. What is left at death also takes the step-up.

What the rate means: 7% is a yearly bill

Freddie Mac's survey put the 30-year fixed rate at 7.18% on November 5, 2026, with the 15-year at 6.57%. That is a residential survey.

A roundup of August 2026 commercial rate sheets listed 5.70% for large agency multifamily loans, 6.63% for CMBS and 5.54% to 8.95% for conventional bank loans (CoreAdvisors, August 18, 2026; a secondary source), and the Mortgage Bankers Association reported quoted commercial rates up 75 basis points from March to May 2026 (MBA, June 1, 2026).

So 7% is inside the range, and your quote decides. The engine does not compute loan interest, so here is the arithmetic. Year one: $120,000 x 7.18% = $8,616.

Borrow another $120,000 each year and pay interest only: balance after year n is $120,000 x n, so ten years of interest is $8,616 x (1+2+...+10) = $8,616 x 55 = $473,880, with $1,200,000 still owed.

Interest on a loan used for living expenses is personal interest and not deductible as investment interest (Treas. Reg. 1.163-8T). Treat the interest as a real cost.

What the slice costs: the engine's numbers

For the same $120,000 a year, redeeming slices with $60,000 of other income costs $51,750 in total over ten years, an effective rate of 6.2% on the gain.

Most of it falls in the 0% and 15% brackets (0% to $98,900 and 15% to $613,700 of taxable income for joint filers in 2026, Rev. Proc. 2025-32, with the projected tables used from 2028). One year of the slice costs $14,490 if other income is $150,000, because the gain sits higher in the brackets.

In California the same slice costs $9,606 in a year, because the state taxes it as ordinary income.

The arithmetic is simple (Freddie Mac home mortgage rate, November 5, 2026, as a stand-in). A slice's tax divided by the cash it raises is a one-time percentage: the ten-year slice tax $51,750 divided by $1,200,000 raised is about 4.3%.

A loan's interest is a recurring one. Compare the first against the second multiplied by the number of years you carry the loan. At 7.18% a year, 4.3% is about 0.6 of a year of interest ($51,750 / $1,200,000 = 4.3%; 4.3 / 7.18 = 0.6).

With California or a larger redemption it takes longer to pay for itself, and ex4's single $800,000 redemption costs $119,013.

When borrowing pencils

• You want to keep the whole property. A slice sells part of the asset and its future income and growth. A loan does not. If the property earns more after costs than the loan rate, borrowing can be ahead even with interest.
• You may need only a bridge. A loan repaid in a year or two costs far less than one-time tax at a higher bracket.
• Your slices would be taxed high. Large redemptions, high other income or a high-tax state erase the bracket advantage.
• Redemption is capped or paused. A loan against property you own does not depend on a sponsor's queue, if credit is available.

When slices pencil

• Your other income is low. Retirement years with income under the 0% and 15% thresholds are the sweet spot.
• You need cash for many years. The loan balance grows every year, so the interest bill grows with it, while the slice tax is paid once.
• You do not want the loan risk. A loan can come due or reprice at a bad time, depending on its terms.
• You want out of landlord work. The 721 removes it.

The 721 has its own bill: sponsor fees every year, no 1031 runway, and a redemption queue you do not control. The liquidity page covers that side.

Decision guide

Start with three numbers: how much cash you will need per year, your income per year, and the lowest rate a lender will quote on the property. If cash needs are modest and income is low, slices are cheap.

If cash needs are short-term or the property is a strong earner, borrowing keeps the asset working. If neither fits cleanly, an installment sale under Section 453 can be a third path, paying in scheduled pieces. The Big Sale Tax Analysis tests all three against your state and your tax years.

Where to compare the two paths

Related comparisons: 1031 exchange vs 721 exchange and Delaware statutory trust plus 721 exchange.

How much tax would you owe? Run your own numbers

Frequently asked questions