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The Tired Landlord's Exit: Selling Single-Family Rentals Without a 1031

By Sean Whitehead, Structured Settlement Consultant & Content Contributor · Last reviewed September 30, 2026 · 12 min read

You bought the houses to build wealth, and they did. But the tenant calls, the turnovers, the property manager's fees, and the repairs haven't gotten easier with age. You want out.

The usual advice is "do a 1031 exchange." That defers the tax, but only by making you buy more real estate. If the goal is to stop being a landlord, that advice misses the point.

This guide explains how a rental sale is taxed, why each common alternative does or doesn't fit, and how a structured installment sale works for a landlord who wants to exit for good.

How a rental property sale is taxed

The gain on a rental is the sale price minus selling costs and your adjusted basis, which is what you paid plus improvements, minus the depreciation you claimed or were entitled to claim. That last part surprises people. Every year of depreciation lowered your taxes then and raises your gain now.

The gain is taxed in layers:

• Unrecaptured §1250 gain. The part of the gain equal to depreciation on the buildings is taxed at a maximum federal rate of 25%.
• Depreciation on appliances, carpet, and furnishings (§1245 property) is taxed as ordinary income.
• The rest is long-term capital gain, taxed at 0%, 15%, or 20%.
• The 3.8% net investment income tax usually applies to rental gains once your income passes the threshold, unless you qualify as a real estate professional running the rentals as a business.
• State income tax applies where you live, and sometimes where the property is.

On a sale of several houses in one year, all of that lands on a single tax return.

Why the usual alternatives may not fit

A 1031 exchange

A 1031 defers tax when you exchange into replacement real estate on strict deadlines: 45 days to identify, 180 days to close. For a tired landlord, the problem is simple: you remain a real estate owner.

• Buying a Delaware Statutory Trust interest can make the replacement property passive, with no tenants or toilets. But you're locked in for the DST's holding period, you don't control when it sells, and fees are layered into the investment. When it eventually sells, you face the same choice again.
• Keeping it up until death can be powerful. If you exchange and hold until death, your heirs get a stepped-up basis and the deferred gain is never taxed. For some families that's the right answer. But it means staying an owner for life.

Holding until death

If your heirs will inherit the houses, a step-up in basis at death wipes out both the capital gain and the depreciation recapture for them. If your age, health, and estate plan point that way, hiring a good property manager and holding may beat any sale. We'd rather say that plainly.

Moving into one of the houses

Converting a rental into your home and later selling it doesn't clear the tax the way people hope. Depreciation claimed after May 6, 1997 is still taxed. Years the house was a rental can shrink the home-sale exclusion. And a house acquired through a 1031 exchange must be held five years before the exclusion is available at all.

Carrying the note yourself

Seller financing spreads the gain under the installment method, but it makes you a lender to the person who bought your house. If they stop paying, your remedy is foreclosure, and you may end up owning the property again. That's more landlord work, not less.

Selling outright

Paying the tax and moving on is sometimes the right answer, especially when the gain is modest. It's simple and fully liquid. The cost is that the whole gain stacks into one year.

How a structured installment sale works for rentals

A structured installment sale uses the installment method of IRC §453, with an insurance carrier replacing the buyer as the source of your payments.

1. Before closing, the purchase agreement provides that part of the price will be paid over time.
2. At closing, the buyer pays the full price with cash and mortgage financing, as in any purchase. The structured portion goes to an assignment company, which takes over the obligation to pay you.
3. The assignment company buys an annuity from a life insurance carrier to fund your payment schedule.
4. You receive scheduled payments, and the gain is taxed as each payment arrives. The buyer has no ongoing obligation to you, and you have no property to manage.

The structure must be in place before closing, and you can't have the right to the structured funds at any point. If the money reaches you first, the deferral is lost.

Rules that matter specifically for landlords

The depreciation portion comes first

Treasury regulations require the unrecaptured §1250 gain to be recognized before the rest of the capital gain. Your early payments are taxed at up to 25% until the depreciation portion is used up; after that, payments carry ordinary capital gain.

Some depreciation can't be spread

Recapture on §1245 property — appliances, carpet, furnishings, and similar items — is ordinary income in the year of sale, even if you receive little cash that year (IRC §453(i)). On single-family rentals this is usually a modest number, but it's there.

Your mortgage comes out of year-one cash

Your mortgage is typically paid off at closing out of the cash portion, and that cash is taxed in the year of sale. If a buyer instead assumed a mortgage larger than your basis, the excess would count as a payment in the year of sale.

This matters most for landlords who did cash-out refinances. If your mortgage is close to or above your adjusted basis, much of the gain lands in year one regardless of how the rest is structured. Check this before assuming a structure will help.

Suspended passive losses release gradually

If rental losses were suspended under the passive activity rules, a fully taxable sale of your entire interest normally releases them all at once. With an installment sale, they're released in proportion to the gain you recognize each year (IRC §469(g)(3)). Your CPA should model how that interacts with the gain.

Other limits

• Selling to a relative or a company you control triggers special rules. Structured sales are generally made to unrelated buyers.
• Flipped or developed property held for sale is "dealer" property and can't use the installment method.
• Sales over $5 million of installment obligations in a year can trigger the §453A interest charge on the deferred tax.
• The 3.8% tax: spreading the gain can keep more years below the threshold, and interest on the payments is generally investment income as well.

A worked example

Illustrative only. The numbers show how the rules interact; they are not a quote or a promised rate. Real rates are set by the carrier when you close.

A couple sells four single-family rentals for a combined $1,400,000.

• They paid $700,000 for the houses and have claimed $284,000 of depreciation on the buildings, for an adjusted basis of $416,000.
• Selling costs are $84,000.
• Their total gain is $900,000: $284,000 of unrecaptured §1250 gain and $616,000 of long-term capital gain.
• For simplicity, assume no §1245 items. The mortgage is paid off at closing rather than assumed.

Their gross profit percentage is 64.3%: $900,000 of gain divided by the $1,400,000 price.

The structure: they take $300,000 in cash at closing to pay commissions and the remaining mortgage, and structure $1,100,000 as 10 annual payments at an assumed 4.5% rate.

• Year of sale: $300,000 cash, of which $192,857 is gain, all of it depreciation gain taxed at up to 25%.
• Each of the next 10 years: a payment of $139,017, totaling $1,390,167, of which $290,167 is interest.

The depreciation gain is fully recognized by the second payment. From then on, each payment carries only ordinary capital gain. The total gain recognized is the same $900,000 a lump sum would produce; what changes is how much lands in each year.

Two cautions:

• Interest isn't free money. It reflects the time value of money. The fair comparison is after-tax income under each option.
• This ignores state tax, the 3.8% tax, and other income, which can all change the result. Run your own scenario in the calculator, and have your CPA check the depreciation figures from your prior returns.

Is this the right exit for you?

A structured installment sale tends to fit when:

• You want out of property ownership entirely, not into different property.
• The gain is large enough that spreading it changes your brackets meaningfully.
• Your mortgage is well below your adjusted basis.
• You want dependable income on a schedule, and you have other savings for flexibility.

It tends not to fit when:

• The gain is small.
• You've refinanced to the point where the mortgage consumes most of the basis.
• You need the full proceeds in cash soon.
• Holding until death for a step-up is realistic and fits your family's plans.

For CPAs and advisors

• Pull the depreciation history from prior returns. Remember that depreciation "allowed or allowable" reduces basis even if it was never claimed.
• Separate §1245 personal property from the buildings. Its recapture is recognized in the year of sale on Form 4797.
• Compare the mortgage balance to adjusted basis early; it determines how much gain is unavoidable in year one.
• Apply the §1250-first ordering of Treas. Reg. §1.453-12 across the payment schedule on Form 6252.
• Model the release of suspended passive losses under §469(g)(3), and net investment income tax exposure for each year.
• Check state treatment, including any nonresident withholding if the properties are out of state.

Frequently asked questions

Current figures (2026)

These change yearly; the rest of the article doesn't depend on them.

• Long-term capital gains brackets, married filing jointly: 0% up to $98,900 of taxable income; 15% up to $613,700; 20% above. Single: $49,450 and $545,500.
• Unrecaptured §1250 gain: maximum federal rate of 25%.
• Net investment income tax: 3.8% above modified AGI of $250,000 (joint) or $200,000 (single). Not indexed.
• §453A interest charge threshold: $5,000,000 of obligations from the year's sales outstanding at year-end.

Sources

• IRS Publication 537, Installment Sales
• IRS Publication 544, Sales and Other Dispositions of Assets
• IRS Publication 925, Passive Activity and At-Risk Rules
• IRS, About Form 6252, Installment Sale Income
• 26 U.S.C. §453 (installment method), including §453(i) recapture income
• 26 C.F.R. §1.453-12 (unrecaptured §1250 gain on installment sales)
• 26 C.F.R. §15a.453-1 (installment reporting; mortgages in excess of basis)
• 26 U.S.C. §469(g) (passive losses on disposition)
• 26 U.S.C. §1031 (like-kind exchanges)

This article is for general education and is not tax, legal, or investment advice. Rental property sales depend on depreciation history, financing, and state rules that only your records and your CPA can sort out. Bring your CPA in before you sign a listing or purchase agreement.

Next steps: Run your numbers in the installment sale calculator, read our apartment complex guide for larger properties, or talk with us.