Real estate investors are facing the interesting challenge of where to put their money once they have sold their real estate assets.  As most of us have experienced when selling real estate outright, there are always the significant state and federal tax bills to be considered.

Unfortunately, there is virtually nothing to trade into because investors are making money and are hesitant to part with a good thing.   Many of these investors are baby boomers who are expected to live for another twenty or thirty years. Baby boomers are currently an average age of 55-70 years old or birth years ranging from the 1940s to 1964.


What is an investor to do if they want to exit their real estate investments? There are other several options available to an investor as they plan to exit their real estate investments:

  • They can pay taxes when they sell it
  • They can hold on to their property (not sell it) and leave to heirs
  • They can use a 1031 exchange to trade into another property[1]
  • They can sell their property and trade into a Delaware Statutory Trust
  • They can trade their property into a Tenant in Common (TIC) investment
  • They can donate to a Charitable Remainder Trust
  • They can sell and carry the paper (using a contract or a trust deed) also known as an installment sale

Paying Taxes

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The investor can convert their assets to cash and reinvest.


  • The investor does not have to manage those assets anymore or deal with the property problems, tenant issues, and ever-changing laws
  • They have cash to gift to their heirs or spend
  • They can gift the money to a charity 

Con:  Capital gains taxes (federal and state), transfer taxes, depreciation recapture, and the 3.8% net investment gain tax all add up.

Holding the Property

Most investors have had success with this over the last 10 years as the Federal Reserve kept lowering interest rates and they could refinance at equal or lower rates. As we move forward and inflation looms and interest rates increase, this strategy may not be as viable or profitable.

Use a 1031 Exchange

Selling your property and purchasing another using a 1031 exchange will delay the capital gains and other taxes you might have to pay.

Pros:   The investor can go about this in many ways using one of the below:

  • Forward exchange
  • Reverse exchange
  • Construction exchange 


  • They only have 45 days to identify a property and 180 days to close, and that may not be enough time in a supply constrained market.
  • With the current supply being so limited, they might buy a lower yielding property or a property that is not of a quality (or in as good a location) as the property they are selling.

Trade into a DST

The investor can place their money in a Delaware Statutory Trust also known as DST – similar to a tenant in common investments. Delaware Statutory Trusts or DSTs are an alternative for 1031 exchange investors seeking replacement properties offering the potential for monthly income and diversification without any on-going landlord duties.

Pro: They don’t have to worry about their sale creating a taxable event since they can use a 1031 exchange to get into the DST. 


  • 1031 DST properties are illiquid
  • 1031 DST investors invest in a pool with a sponsor and lose day to day control of their asset and money
  • Once the DST offering is closed, there can be no future contributions to the DST by either the current or the new investor.  If there is a shortfall in cash or a need to deal with major capital improvements such as a new roof or parking lot, cash profits that should be going into your pocket, will be kept by the sponsor to bulk up reserves or to fund these capital improvements.
  • DSTs are hard to exit because the investor needs to find a new investor to take their position. There might be a discount from a buyer because they are a fractional investor and have no power to make any decisions.[2] 

Trade into a TIC

They can trade into a “tenant in common (TIC) partnership, where a sponsor will assemble a group of accredited investors to share in the ownership of a property or properties. 


  • Shared risk
  • Usually an experienced sponsor
  • The investor does not have to be involved in the day to day operations of the property
  • There is usually an agreement when investors will exit the investment.
  • Regularly scheduled cash payments (return) and depreciation shelter for the investor
  • For an example of a lower risk TIC, logon to
  • They have two models:
  1. Invest cash and own a property with others that has no bank loan on it
  2. Properties to invest in using money out of a 1031 exchange 


  • Lack of investor control
  • Illiquid
  • No ability to impact the management of the investment[3]

Donate to a Charitable Remainder Trust

A charitable remainder trust (CRT) is an irrevocable trust that generates a potential income stream for the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to a favorite charity or charities.


  • First, after the investor has set up and donated to a charitable trust, they are allowed to take an income tax deduction and spread it over five years, for the value of the gift to charity.  However, they do not get to deduct dollar for dollar the amount that they initially gave. Instead, the IRS calculates the total deduction as the amount they originally gave minus what they can expect to receive as a return through interest payments. For example, if they gave $200,000 but are expecting to get back $100,000 in interest over the course of their life, their total deduction would have to be $100,000.
  • Second, because the property given to the trust will go to the charity outright upon the investor’s death, the property will not be included in their estate for the purposes of determining their estate tax.
  • The charity will pay them, (or someone they have named) a portion of the income that the trust funds accumulate. These payments will last for a set number of years, or for the remainder of their life, depending upon how the documents were drawn up. The trust will end at the time of their death and the donated property will go to the charity.
  • It’s a perfect place to place assets – if there are no heirs. 

Cons:   It is irrevocable – in other words it cannot be reversed.[4]

Installment Sale (Carrying the Paper)

Carrying the paper is most effective if a property is owned free and clear and not wrapped around an existing financial ( i.e. mortgage or trust deed) instrument – like a note and trust deed, or a mortgage – especially since most financial instruments prohibit the wrap. 


  • The investor pays taxes only on the income received: Tax on the income received on the interest charged and capital gains taxes (on the reduction in principal of the investor note.) If the investor is retired and this is their major source of income, they might be in a lower income tax bracket for the investor income tax as compared to when they were working.
  • The investor’s tax on the principal will be the same but it is spread out over many years and by default puts the investor in a lower tax bracket if they are selling an expensive piece of property like a small office, retail or industrial building.
  • With a strong down payment, (20 or 30%) investors have a solid income stream that they can control and thereby control taxes as well.
  • The property typically will go up in value and so the risk reduces over time
  • If banks are willing to take the risk, why shouldn’t the investor?
  • Heirs can inherit the note
  • In an emergency, the note can be sold on the secondary market with a discount if the buyer has been paying on time and the note is seasoned.


  • If your sale results in a loss, the investor can’t use the installment method. If the loss is on an installment sale of business or investment property, they can deduct it only in the tax year of sale (unstated interest.)
  • They need a strong buyer
  • The investor needs to aggressively manage  the terms of the installment sale  to prevent a  prepayment penalty when they are not ready to  cash out
  • The investor has to keep an eye on the property to make sure the Buyer is taking good care of the investment – if the property needs to be repossessed  for non-payment on the note, then they will not have to repair the property
  • The investor is the bank and need to be comfortable with foreclosing on the note if the Buyer does not pay
  • They need an experienced real estate attorney and may need a collection escrow account. [5]


Taxes play a large role for most investors (especially if they have successfully traded up more than one time) – their existing basis is then carried forward to the next property and will affect the residual return when they want to sell.

There are many ways for an investor to exit from an existing property. If they don’t want to pay capital gains taxes, their options are:

  • They can use a 1031 exchange to trade into another property
  • They can sell their property and trade into a Delaware Statutory Trust
  • They can trade their property into a Tenant in Common (TIC) investment
  • They can donate to a Charitable Remainder Trust
  • They can sell and carry the paper (using a contract or a trust deed) also known as an installment sale

But most investors have limited choices:

  • They can use a 1031 exchange to trade up
  • They can refinance to take out cash and purchase other investments
  • They can leave their properties to their heirs
  • They can use a charitable remainder trust to create an annuity
  • To carry the note, the property being sold needs to be free and clear of other encumbrances, most existing trust deeds and mortgages do not allow a wrap around the existing financing

Every investor has a different set of circumstances that drive their decision-making process. It all depends on where an investor is at in their personal or business investment cycle.  Are they holding on to the property? Reinvesting? Stepping up to larger or different property? Working through a partnership split? Diversifying or liquidating? Tired of owning the property? Investors must take the time to look at the various options, meet with real estate attorneys, CPAs, and real estate agents to listen to the many different ideas that are in the marketplace today, to develop a successful strategy to exit their investments.

Finally, I want to mention that when trading into another property via a 1031 exchange, and trading up or into a different product class, an investor must make sure to do their research as they move into a product type they may not be familiar with. Not all NNN investments are great; not all mobile homes are home runs, nor are investments in other “not as popular” products, but a patient and thoughtful investor will see the best results.


[Editor’s Note:  If you’re thinking about selling, be sure to call AOA’s Commercial Brokerage Division, professionally serving our members’ needs for over 35 years!]





5 installment sales


Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company.  He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM).  Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).