You Sold the Building. Now What? Understanding Your Post-Sale Options

Short answer: A 1031 exchange lets you defer capital-gains and depreciation-recapture tax by reinvesting in like-kind real property within strict IRS timelines. Delaware Statutory Trusts (DSTs) and 721 UPREITs are securities and can only be sold or recommended by FINRA-licensed broker-dealers or SEC-registered investment advisors. This article is educational only. Our role is education and coordination.

If you have held an apartment building for decades, the tax liability on a sale can be substantial, sometimes approaching 35 to 40% of your equity when you combine federal capital gains, California state tax, depreciation recapture, NIIT, and potential IRMAA Medicare premium increases. Understanding what comes after the sale is just as important as understanding the sale itself.

The Four Post-Sale Paths

Every apartment owner who sells faces a choice among four general paths. Each has trade-offs. None is universally “best.”

Path 1: Sell and Pay the Tax

The simplest option. You sell, pay all applicable taxes (federal capital gains, state tax, depreciation recapture, NIIT), and keep the remaining cash. You have complete liquidity and no ongoing real estate obligations.

The trade-off: For a long-held, highly appreciated building in California, the combined tax bill can be very large. Your CPA can model the exact amount for your situation.

Path 2: 1031 Exchange into Another Property

Under Section 1031 of the Internal Revenue Code, you can defer capital-gains and depreciation-recapture tax by reinvesting the proceeds into “like-kind” real property. The IRS requires identification of replacement property within 45 days and closing within 180 days. A Qualified Intermediary (QI) must hold the funds; you cannot touch them.

The trade-off: You defer the tax, but you take on a new property and the management that comes with it. For owners who are selling because they are tired of management, this can feel like trading one problem for another.

Path 3: 1031 Exchange into a DST

A Delaware Statutory Trust (DST) is a legal entity that holds title to institutional-grade real estate (apartment complexes, medical buildings, logistics centers). Investors own a beneficial interest in the trust. The IRS recognizes DST interests as “like-kind” property eligible for 1031 exchange treatment.

Important: DST interests are securities. They are sold through Private Placement Memoranda and can only be offered by FINRA-licensed broker-dealers. Sweetwater Multifamily does not sell, recommend, or evaluate DSTs. Our role is limited to educating clients about the general concept and coordinating with the licensed professionals who handle the securities transaction.

The trade-off: You defer tax and move to passive income (no management), but you give up control, accept limited liquidity, and take on the risks inherent in any real estate investment. DSTs typically have a 5 to 10 year hold period and are illiquid during that time.

Path 4: 721 UPREIT

A 721 UPREIT (Umbrella Partnership Real Estate Investment Trust) allows a property owner to contribute their property directly to a REIT's operating partnership in exchange for operating partnership units. These units may later be convertible to publicly traded REIT shares, potentially providing liquidity without triggering a taxable event at the time of contribution.

Important: 721 UPREIT transactions involve securities. They require analysis by your CPA and a FINRA-licensed or SEC-registered professional. Sweetwater Multifamily does not evaluate, recommend, or facilitate 721 UPREIT transactions.

The trade-off: Potentially the most tax-efficient path for the right situation, but also the most complex, with limited availability and significant restrictions.

What All Four Paths Have in Common

Every path requires the same starting point: knowing what your building is actually worth, what your tax exposure looks like, and what you would keep under each scenario. That is why we build a four-scenario “Real Net” financial model for every client before any listing decision is made. You see all four paths, side by side, in plain English, including the path where you keep the building and do not sell at all.

Our Role: Education and Coordination

Sweetwater Multifamily is a licensed real estate advisory practice. We manage the sale of your property, from valuation through closing. When it comes to post-sale reinvestment involving securities (DSTs, 721 UPREITs), our role is strictly limited to:

• Educating you about the general concepts so you can have informed conversations with your advisory team
• Coordinating timelines between your CPA, estate attorney, Qualified Intermediary, and FINRA-licensed investment advisor
• Managing the real estate sale process to ensure exchange timelines and provisions are protected

We do not sell securities. We do not recommend specific investments. We do not receive compensation from securities transactions. All evaluation and execution of securities-related strategies is handled exclusively by your CPA and FINRA-licensed or SEC-registered professionals.

What to Do Next

Start with the numbers. A free Property Snapshot gives you your building's current estimated value, your approximate tax exposure, and a foundation for conversations with your CPA and financial advisor. One page, plain English, no pitch.