Selling a Self Storage Facility: The Tax on Paving, Gates and Buildings

What a storage buyer is really paying for

A storage facility looks like simple real estate, but the price covers five different kinds of property, each taxed differently when you sell:

• Land. Never depreciated, so all of its appreciation is long-term capital gain.
• Buildings. Single-story drive-up rows, climate-controlled buildings and the office are 39-year nonresidential real property (IRC 168(c)); their straight-line depreciation is taxed at up to 25% (IRC 1(h)(1)(E), 2026).
• Site work. Paving, fencing, drive aisles, drainage and lighting are 15-year land improvements (IRS Publication 946, 2025).
• Equipment. Gate and keypad access systems, cameras, kiosks, office furniture and software: 5- or 7-year Section 1245 property.
• Intangibles. In-place rentals, the name, the website and phone number, and any management systems.

Because a running facility is a business, both sides generally report the split on Form 8594 under the residual method (IRC 1060), and the buyer will push value toward the fast-writeoff classes. Each dollar moved there can be ordinary income to you. See purchase price allocation.

Paving and fencing: the recapture most storage owners miss

Here is where storage differs from an apartment or office sale. Site work is not Section 1245 property; it is Section 1250 property, like the building. Owners often assume that means a 25% ceiling. It does not if you took bonus depreciation. For recapture purposes, bonus depreciation is not a straight-line method (Treas. Reg. 1.168(k)-2(g)(3)), so the part of it above what straight-line would have allowed is "additional depreciation" taxed as ordinary income under IRC 1250(a), at up to 37% (IRC 1(j), 2026).

In our example, $500,000 of site work was fully deducted in 2019. Straight-line over 15 years would have allowed about $250,000 by 2026, so about $250,000 is ordinary recapture. Add $100,000 of gain on the equipment, recaptured under IRC 1245, and $350,000 of the gain is taxed at ordinary rates. The tax is $1,157,627 in total, 25.4% of the gain: $986,475 federal plus $171,152 of 3.8% NIIT (IRC 1411, 2026). Texas adds nothing, since its constitution bars a personal income tax.

A quirk works in long-term owners' favor: once 15-year property is fully depreciated under the regular 150% declining balance method, straight-line has caught up, so the ordinary piece shrinks to zero and it all sits in the 25% layer.

Why cost segregation is so common in storage, and what it costs at exit

Storage sites combine large paved areas, long fence lines and simple buildings, which gives cost segregation studies plenty to reclassify. With 100% bonus depreciation back for property acquired after January 19, 2025 (P.L. 119-21; Publication 946), and available on used property you buy as long as you never used it before (IRC 168(k)(2)(E)(ii)), buyers will run the same study on your facility the day they close.

For you as seller the question is the spread. The deduction came off income in the year you took it, often at 32% to 37% (IRC 1(j), 2026); the recapture comes back at your ordinary rate in the sale year. Holding for years in between is the real gain. If you are within a year or two of selling, a new study can be a near wash, as our cost segregation before a sale page shows, and depreciation recapture covers the mechanics.

Who buys storage, and selling for REIT operating partnership units

Storage buyers range from the large public REITs to private equity funds and regional operators. Cash from any of them is a taxable sale. Some REIT buyers can instead pay in units of their operating partnership, which you receive tax-deferred under IRC 721. Your gain follows the units: a built-in gain the partnership must track for you (IRC 704(c)), triggered when you redeem units or when the REIT sells your facility, unless a negotiated tax protection agreement compensates you.

Three points to settle up front. Cash taken alongside the units can be a disguised sale (IRC 707(a)(2)(B)). Paying off your mortgage at closing shifts debt and can create gain (IRC 752). And units are not real estate, so you can never 1031 again, though heirs generally get a basis step-up. Read our 721 UPREIT analysis.

1031 out of storage: the parts that do not defer

Since 2018 only real property qualifies for a 1031 (IRC 1031(a)(1)). Land, buildings and site work are real property under Treas. Reg. 1.1031(a)-3; gate systems, kiosks and furniture are not. In our second example, exchanging into another storage facility defers everything except the $100,000 of equipment, which costs $25,028.

The trap is the replacement. Section 1250 recapture is deferred in an exchange only to the extent you acquire enough Section 1250 property; otherwise the shortfall is recognized (IRC 1250(d)(4)(C)). Exchange a bonus-depreciated storage site into raw land and the $250,000 of additional depreciation is taxed now. In our third example that pushes the bill to $103,829, $78,801 more than exchanging into another improved property. A similar limit applies to 1245 property that counts as real estate for 1031 purposes (IRC 1245(b)(4)). Start with our 1031 exchange analysis, or a Delaware statutory trust if you are done managing.

Expansion land, phases and carrying a note

Many facilities sit next to a pad held for a future phase. Selling it separately, or carving it out of the deal, lets you treat it as raw land: no recapture at all, and a natural candidate for a 1031 into a different property or an installment sale. If you carry a note on the facility itself, the ordinary recapture is still taxed in the year of sale even when most of the price comes later (IRC 453(i)), so size the down payment to cover it. Secure the note with a first deed of trust, an assignment of rents and a personal guarantee from the buyer's owners; our seller financing page covers the terms.

The state layer

Our example uses Texas, where the Texas Constitution bars a personal income tax (art. 8, sec. 24-a) and, since November 2025, a capital gains tax (sec. 24-b). The same sale by a California owner adds up to 13.3% (FTB, 2025 schedule) on every layer, including the recapture, and a facility in another state is taxed by that state with possible withholding at closing. See our state table and the commercial property page for how the 1231 lookback can turn part of the gain ordinary.

Comparing a cash sale, a 1031, REIT units and a note for your facility? Get the Big Sale Tax Analysis.

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