How 1031 Can Help With Retirement Planning

A 1031 exchange lets property owners defer taxes and build wealth for retirement – but what do you do when it’s finally time to retire?

IRC Section 1031 allows for the deferral of capital gains taxes and depreciation recapture from the sale of business or investment property when the seller uses the sales proceeds to purchase a like-kind property. Because a 1031 exchange allows you to use more of your gains for the purchase of a replacement property, like-kind exchanges help investors upgrade to more valuable properties and build more wealth over time.

When it’s time to retire, you can sell your property and use the proceeds to fund your retirement. However, when you finally sell in a taxable sale (without exchanging into a new property), you’ll have to pay the capital gains taxes you previously deferred over the years, which could end up being a considerable sum.

A common mistake property owners make is to assume that when they retire, their only choice is to sell their properties and pay the capital gains taxes. But just because you no longer wish to actively manage a property doesn’t mean you have to exit your 1031 exchange strategy.

Depending on the type of property, your liquidity and income needs, and how active a role you wish to take in your portfolio’s management, there are different strategies for making the most of your real estate investments and the tax incentives available to you. Here are a few of the most likely scenarios and how Section 1031 can be used to your benefit.

Exit strategies for 1031 upon retirement

When selling a property that was acquired as part of a 1031 exchange, one thing to keep in mind is timing. Capital gains tax rates can change depending on which political party is in power, so it’s a good idea to discuss your proposed sale with your advisors well in advance and select the right time, as the date of sale could make a big difference when it comes time to pay the associated taxes. And if you’ve exchanged from one state to another, you could have complex calculations to make based on where your properties were held.

You’ll also need to worry about depreciation recapture and Net Investment Income Tax, which is why it’s important to consult with professionals to understand your options. Depending on your situation, there are some strategies that could limit your liability, such as tax loss harvesting, where other investments are sold at a loss to offset capital gains.

Another option is to reinvest in another tax-advantaged vehicle such as a Qualified Opportunity Fund. The One Big Beautiful Bill Act (OBBBA) of 2025 made Opportunity Zones tax incentives permanent. With the right OZ investments, it’s possible to defer and potentially exclude a portion of your gains.

Using 1031 when selling a small business for retirement

If you operate a small business, retirement may involve stepping away from or selling that business, and if you own the property where your business operates, it may no longer make sense to hold it. In that case, it’s time to sell, but that doesn’t mean your 1031 journey is done.

One of the key components of Section 1031 is that the properties being exchanged must be “of like kind.” It’s a misconception that this means they have to be the same type of property; in fact, any real property held for business or investment use is considered to be of like kind to any other business or investment property. That means if you’re selling a retail storefront, warehouse, farm, or manufacturing facility, you could perform an exchange into something that doesn’t require active management.

Less-active properties can include triple-net leases (NNN), where more of the costs and maintenance are the responsibility the tenant, and Delaware Statutory Trusts (DSTs), where a professional property manager oversees a broad portfolio of investments.

Delaware Statutory Trusts are especially popular with retirees because they provide diversification and passive income in retirement. By performing an exchange into a DST or NNN property, you could spend less time managing property and more time enjoying your retirement while seeing your net worth increase.

Read our full guide to 1031 for small businesses to learn more about how small business owners can take advantage of Section 1031. For apartment managers or owners of single-family rental homes, there are other ways to incorporate 1031 into retirement planning.

Rental properties and vacation homes: downsizing for retirement

Whether property ownership and management is your primary business or an additional source of income, 1031 exchanges can help owners of single-family or multifamily properties to build wealth over time. Just like commercial property owners and entrepreneurs, residential property owners can transition to passive property ownership in retirement while continuing 1031 tax deferral.

For some property owners, the line between business and personal use isn’t cut and dry. For example, if the property is a duplex and the owner lives in one unit while renting out the other, the part of the property that is rented can qualify under Section 1031, while the portion of the property used as the owner’s primary residence can qualify under Section 121, which provides a tax exclusion for a taxpayer’s main home.

Another situation some property owners face is when they own a vacation home that is rented out through a short-term rental site when not being used by the owner. There are specific rules for how many days of the year the property must be rented vs. how many days it is used as a vacation home, but it is possible to include a vacation property as part of a 1031 exchange.

Some homeowners may want to sell their primary residence and downsize to a smaller home, moving into their rental properties when they retire. They may also own a vacation property in a warm-weather state and wish to move there full-time upon retirement. If this property, formerly used for business purposes, was acquired via a 1031 exchange, it is possible to make it your primary residence without performing a taxable sale.

Once you’ve moved into your vacation or rental home and made it your primary residence for two of the previous five years, you’ll be eligible to sell it as a primary residence under Section 121. You will not be eligible to exclude all of your gains through Section 121, but you will be able to exclude some of what you might otherwise pay. Situations that combine 1031 & 121 can get complicated, and the rules aren’t always cut and dry, making good advice from experienced tax and legal advisors essential.

1031 and estate planning

Remember that with 1031, you’re deferring the taxes you owe, not eliminating them, so when you eventually sell your property, you’ll still have to pay those taxes at the current rate. But if you don’t sell the property until your death, your heirs could avoid having to pay those capital gains taxes entirely.

When you leave a property in your will, your heirs inherit the property with a step up in basis. This means that the basis for the property is adjusted to the fair market value at the time of your death. If you purchased a property at $100,000 and held it until your death, when it was worth $1,000,000, your heirs (when they eventually sell it) would only pay taxes on gains based on an initial value of $1,000,000. In this way, 1031 can maximize how much you’re able to leave behind for future generations.

Exchanging into Delaware Statutory Trusts upon retirement can sometimes make estate planning simpler. Because the average minimum investment for a DST is relatively low compared to the price of a whole property, you can exchange a single property investment into multiple DSTs. This could make it much easier to assign your assets in your will, eliminating conflict among your inheritors.

Continuing to perform 1031 exchanges until death, known as the “swap till you drop” strategy, relies on both IRC Section 1031 and the step up in basis. While 2025’s major tax bill did not include any changes to Section 1031 and increased the estate tax exemption, there have been proposals in the past that would have eliminated 1031, created a cap for deferred gains, or eliminated the step up in basis, which would mean the end of this strategy.

That’s why it’s important to understand the current laws to make sure you don’t need to alter your investment strategy. You should always consult with your tax counsel to understand your specific liabilities before deciding to perform a 1031 exchange, and work with professionals who understand how to perform their duties in accordance with the law.

Finding the right QI for your exchange

You may plan to perform one exchange or multiple exchanges; you may be exchanging from an office property into a triple-net lease or DST; you may plan to live in your single-family rental home during retirement; or you may plan to hold your investment property until your death. Regardless of which of these scenarios applies, you will need a Qualified Intermediary (QI) for each exchange you perform.

JTC’s team has decades of experience in facilitating 1031 exchanges, with specific expertise in Delaware Statutory Trusts and less-common exchange types like those described in this article. We offer the same great service to first-time exchangers that we do to our major corporate clients, including an online platform that provides 24/7 access to exchange information from anywhere in the world. No matter how complicated your exchange or how intricate your retirement strategy, JTC is ready help.