1031 Exchange vs Taxable Sale: Five Things Owners Miss

1031 exchange vs installment sale calculator

The trade in one sentence

A 1031 exchange lets you skip the tax now if you keep owning real estate. A taxable sale costs the tax now and buys your freedom: no debt, no deadlines, no tenants, and some tax benefits only a taxable sale unlocks. Most owners compare only the tax bill. The five items below are what changes the answer.

1. Your 3% or 4% loan becomes a 7% loan

Either way, the old loan is paid off at closing. The difference is what happens next. To defer all the gain in a 1031 you must buy property of equal or greater value and replace the debt you paid off, or put in extra cash.

Debt you do not replace is treated as cash received (boot) and is taxed. So an owner with a $1,000,000 loan at 3.5% who exchanges into a bigger property usually signs a new loan at today's rates.

At 7% on $1,000,000, the payment goes from $4,490 to $6,653 a month, and first-year interest roughly doubles. Over ten years that is several hundred thousand dollars of extra interest before the interest deduction. Set that against the tax the exchange defers. In a taxable sale you hold cash instead, and today's rates work for you rather than against you.

2. Suspended passive losses only free up in a taxable sale

Rental losses you could not deduct over the years (passive activity losses) are released only when you dispose of your entire interest in a fully taxable sale to an unrelated buyer (IRC 469(g)). In a 1031 they stay suspended and attach to the replacement property. In a taxable sale they come off any income, including the gain, wages and the 25% depreciation layer.

In our example, $150,000 of suspended losses cuts the taxable sale's bill from $586,057 to $519,619, a $66,438 difference that the 1031 path never sees. More on suspended losses in a 1031 and old losses in a sale year.

3. Your old low basis follows you

The replacement property takes the old property's adjusted basis, plus any extra cash or debt you add (IRC 1031(d)). If depreciation has pulled your basis close to the land value, the new property starts low too, so there is less to depreciate and the deferred gain, including the depreciation, is waiting for any future taxable sale. Read your real basis after depreciation before you assume how much gain you have.

4. 40% estate tax above the exemption

The strongest case for a 1031 is holding until death: heirs receive a stepped-up basis (IRC 1014) and the deferred income tax disappears.

But the full value of what you own counts toward the federal estate tax, 40% on the amount above the exemption, which is $15,000,000 per person and $30,000,000 for a married couple in 2026. For an estate near or above that line, deferral grows the taxable estate.

The 1031 and estate tax check shows whether this applies to you.

5. Deadlines and what you own afterward

You have 45 days to identify replacement property and 180 days to close, with the proceeds held by a qualified intermediary. Under deadline pressure owners overpay or accept a property they would not otherwise buy. And after the exchange you still own real estate: tenants, repairs, debt and a future sale. A passive replacement such as a Delaware statutory trust removes the management but adds fees and gives up control.

California owners exchanging into property in another state also keep a California filing: an annual Form FTB 3840, and California taxes the deferred California gain when the replacement is eventually sold.

Worked example: one $2,400,000 sale, two ways

A California married couple with $150,000 of other income sells an apartment building for $2,400,000 in 2026. Adjusted basis is $800,000 after $400,000 of depreciation, so the gain is $1,600,000 ($400,000 of it the 25% layer). They owe $1,000,000 on a 3.5% loan.

• Taxable sale: $586,057 of federal, net investment income and California tax caused by the sale. With $150,000 of suspended passive losses freed, $519,619. They walk away with the cash and no debt.
• Full 1031: $0 tax now. They buy a larger property and borrow at least $1,000,000 again. At 7% instead of 3.5%, interest runs about $35,000 a year higher. The deferred gain and the $150,000 of losses carry into the new property, and the new property starts with the old $800,000 basis plus whatever new money goes in.

Which is better depends on how long they will hold, the return on the new property, their estate and whether they want to own real estate at all. Tax figures from the Big Sale Tax engine (2026 law, California FTB 2026 schedule); selling costs and local taxes excluded; rates illustrative. Education only.

When each one fits

• A 1031 tends to fit owners who want to keep owning and managing real estate, can buy a property they actually want inside 180 days, can carry the new debt or add cash, and expect to hold until death with an estate under the exemption.
• A taxable sale tends to fit owners who want out of real estate, have large suspended losses, have a cheap loan they would have to replace at a higher rate, or have an estate where deferral only grows a 40% bill.
• In between: an installment sale spreads the tax without buying more property; see 1031 vs installment sale and 1031 exchange alternatives.

Also free: the book Same Sale, Different Tax, the same $1,000,000 gain taxed ten ways. Want it run on your sale? Book a free scope call to see whether the Big Sale Tax Analysis is worth it.

Who you will talk to

Hans Goldstein · Sacramento, California
Hans Goldstein: Tax & Exit Planning, an independent practice. Enrolled Agent, admitted to practice before the Internal Revenue Service. CA Insurance License #4273294, NPN 20602398.

What happens first

You fill in the short form for a free scope call, about 5 minutes. Hans reviews every one personally and replies within 1 business day. If it is a fit, you get a link to book the call.

The scope call

Fifteen minutes, free: price, timeline, what you are selling and what the money is for. Scope means you hear whether the analysis is worth it for your sale.

What you get

A written side-by-side comparison of your cash-sale baseline against every path that fits, year-by-year numbers, a written recommendation, and a review meeting with you and, if you like, your CPA and attorney.

What it costs

The scope call is free. The Big Sale Tax Analysis is $5,000 per household per transaction, only if you decide it is worth it. No retainer, no hourly billing, no obligation to use any strategy.

How Hans is paid

The $5,000 fee pays for analysis only and is not reduced or credited if you buy anything. You are never required to buy anything. No referral fees are paid to or received from brokers, CPAs or attorneys. Hans is also a licensed insurance producer with a separately owned insurance business. That business is not part of this engagement, and the analysis does not recommend insurance products. If you later choose an installment sale funded through an insurance company, that company pays Hans a commission through his separate insurance business. He may be compensated by that business if you use an insurance-funded installment sale. Hans is an Enrolled Agent (EA), admitted to practice before the Internal Revenue Service. He is not a CPA, attorney or registered investment adviser; the analysis models tax effects and does not recommend specific securities. Read the disclosures.

Book a free scope call or call 213-340-2018. Hans answers or calls back the same business day.

Frequently asked questions