For Investor-Landlords & Absentee Owners

Exit your rental property. WITHOUT THE TAX BOMB.

If you're an investor-landlord considering an exit, you've probably done the math on what a traditional sale would cost you. Federal long-term capital gains, depreciation recapture, NIIT, and Arizona state tax can collectively claim 25% to 35% of the gain calculated from "cost basis". This adds up to paying five to six-figures of tax on a typical Phoenix long-held rental. Most landlords look at that number and decide to continue holding instead. The tax bill becomes the wall.

There are (3) legal structures that route around that wall. Almost no agent in Phoenix knows how to deploy them. I do, because I've executed them personally.

Your three real options:

#1 - Installment Sale

You carry a note. Capital gains are recognized pro-rata as principal is received, usually compressing into lower brackets. You earn ongoing interest income. Total proceeds typically run 20-40% higher than a conventional cash sale, with no requirement to identify a replacement property. The down payment is sized to cover the depreciation recapture obligation, which under §453 is recognized in year of sale and not deferred.

#2 - 1031 Tax Exchange

A qualifying Section 1031 exchange may defer recognition of eligible gain when real property held for business or investment is exchanged for qualifying replacement real property. The replacement property must generally be identified in writing within 45 days, and the acquisition must generally be completed by the earlier of 180 days after the transfer or the applicable tax-return deadline. The transaction should be arranged with a qualified intermediary before the relinquished property closes.

#3 - Hybrid Structures

For larger estates, a partial §453 combined with a charitable remainder trust, conservation easement, or qualified opportunity zone investment. More complex, more documentation, but can reduce effective tax to near zero for the right situation. Requires close CPA, attorney, and agent triangulation.

Send me the property address, your estimated cost basis, and your current mortgage balance. Within five business days I'll return a written one-page analysis showing all three structures applied to your specific numbers. Your CPA gets a copy. You decide what happens next. There is no obligation and the analysis is at no cost.

run my exit analysis

Frequently Asked Questions

Please reach us at justin@libertasrealestate.com if you cannot find an answer to your question.

Q: I own a rental in Phoenix. How do I sell without a huge tax bill?

A: Selling a long-held Phoenix rental may create federal capital-gain tax, depreciation recapture, Arizona income tax and, in some cases, the Net Investment Income Tax. Arizona’s current individual income-tax rate is 2.5%, but the seller’s actual liability depends on the property’s adjusted basis, depreciation history, ownership structure, income and other individual circumstances. Potential strategies may include a conventional sale, qualifying installment sale or Section 1031 exchange. A CPA should calculate the actual liability and compare the available options before the transaction is structured. There are three legal structures that can route around most of this exposure: an IRC §453 installment sale (spreads gain across years of note payments), a 1031 exchange (defers gain entirely by rolling into replacement property), or a hybrid structure combining elements. The right choice depends on whether you want to remain in real estate, exit cleanly, or optimize for tax.

Q: What is a 1031 exchange?

A: A 1031 exchange is a tax-deferred swap of investment real property for like-kind investment property under Internal Revenue Code §1031. The seller defers the entire capital gain (and depreciation recapture) by reinvesting the proceeds into a qualifying replacement property within strict timelines: 45 days from sale to identify potential replacement properties, and 180 days from sale to close on the replacement. The exchange must be facilitated by a Qualified Intermediary who holds the proceeds between sale and replacement purchase. 1031 exchanges are particularly powerful for investors who want to trade up, change markets, consolidate properties, or transition to passive ownership via Delaware Statutory Trusts.

Q: What is depreciation recapture?

A: Depreciation recapture is the federal tax owed on the cumulative depreciation deductions a real estate investor claimed during their ownership period. When the property is sold, the IRS treats the depreciation as having reduced the property's basis and recaptures the resulting gain at a tax rate of up to 25 percent for §1250 property (most real estate). Critically, under IRC §453(i), depreciation recapture is recognized in the year of sale and is not eligible for installment-sale treatment. This means a §453 structure helps spread capital gains but does not spread recapture — making down payment sizing a critical decision for investor sellers.

Q: Should I sell to an iBuyer or list on the market?

A: iBuyers like Opendoor and others typically offer 5 to 10 percent below fair market value in exchange for speed and certainty of close. For investor sellers with significant tax exposure, the gap is even wider — because a cash sale to an iBuyer triggers immediate full tax recognition, while a structured listing using §453 or 1031 can preserve six figures of value. iBuyers can be the right choice for sellers who genuinely need to close in 14 days, are willing to absorb the price discount for that speed, and are not concerned about the tax structure. For most investor sellers with time and significant equity, a properly structured listing nets meaningfully more.

Q: What's the best way to maximize what I net from selling my rental?

A: Maximizing net proceeds from a rental sale requires three coordinated decisions. First, the right pricing strategy - neither overpriced nor leaving money on the table. Second, the right transaction structure - cash sale, §453 installment, 1031 exchange, or hybrid - chosen based on your specific tax situation, time horizon, and whether you want to remain in real estate. Third, the right team - a real estate agent who understands creative structures, a CPA who can model the tax implications, and an attorney who can draft enforceable documents. The single biggest mistake investor sellers make is letting an agent who only understands cash sales lead the conversation. The structure decision is worth more than the marketing decision.

Disclaimer

Justin Thorstad, PLLC is a licensed Arizona real estate Broker in Arizona, Department of Real Estate License #BR541826000 operating under Libertas Real Estate. All information on this website is provided for general educational and informational purposes only. Nothing on this website constitutes legal, tax, financial, investment, mortgage, or accounting advice. Real estate transactions involve significant financial and legal complexity. Before structuring any transaction - particularly transactions involving seller financing, IRC §453 installment sales, 1031 exchanges, or other creative structures. You should engage licensed qualified professionals including a licensed Arizona attorney for legal review, a Certified Public Accountant for tax planning, and a licensed mortgage loan originator if loan origination services are required. Market statistics referenced on this website are from publicly available sources at the time of publication. Real estate markets change continuously; historical performance is not a guarantee of future results. All transactions are subject to verification, market conditions, applicable law, and the satisfaction of all closing conditions. Equal Housing Opportunity.