Beyond sell or inherit: A third exit for appreciated property

As Baby Boomers age into retirement, advisors are increasingly discussing appreciated real estate exit strategies. Redfin's analysis of Federal Reserve data shows Americans 55 and older held roughly 61% of the nation's $48 trillion in real estate wealth as of late 2025, a record concentration. Alongside the primary residences in that figure sit the rentals, the small commercial buildings, and the land, which in most cases is fully depreciated, decades held, carrying gains that dwarf the brokerage account.

Most importantly, some advisors, unknowingly, fail to disclose all of their exit options. Besides a simple sale or gift to family, there’s a third option on the table.

Option one: Sell

Retirees often acquired property to build equity and fund their retirement, so selling to access that cash is the logical next step. However, clients underestimate the tax, and it isn't one number.

Federal capital gains, depreciation recapture at 25% on every dollar deducted over the years, the 3.8% net investment income tax, and state tax all arrive at once. On a long-held property the recapture is often the largest component that nobody really accounts for. As an advisor, make sure to model the after-tax proceeds before the property goes under contract, not after.

Option two: Pass it to the family

Not is it just a sentimental choice, it is often the best financial outcome available. Property held until death receives a stepped-up basis. The embedded gain is erased along with the accumulated depreciation recapture, and the heir starts a fresh depreciation clock from the higher basis.

To access equity and fund retirement, borrowing against the property is the direct route: loan proceeds aren't taxable, the property stays put, and the step-up still arrives. The only cost is debt service.

What doesn't work is gifting the property during life. That carries the basis over to the recipient and forfeits the step-up entirely, handing the family a tax bill patience would have eliminated. A trust doesn't help either. It names who inherits and avoids probate, but the basis, depreciation schedule and recapture exposure are unchanged.

Option three: Exit the property without selling it

Most clients don't know this exists.

Section 1031 lets an owner sell an investment property and roll the proceeds into another without paying tax on the gain. The catch is that the replacement must be real estate, and most retirees don't want another building to manage.

A Delaware statutory trust – a fractional interest in a large, professionally managed property – qualifies as replacement property. The client still owns real estate but someone else runs it. From there, a 721 exchange converts that interest into operating partnership units in a real estate investment trust (REIT), again without triggering tax. The client holds a diversified portfolio instead of a single asset, and units can be sold in pieces. Held until death, they receive the same step-up the building would have.

Preserving the step-up doesn't require keeping the building. All three paths can reach the same tax result, so the comparison is about everything else: income, liquidity, management burden, and whether three heirs can divide the asset without selling it.

Every deferral route has to be structured before the sale closes, not after. Advisors are already in the room at the annual review, before the broker or the CPA. Ask what the client owns beyond the residence, and what they want to happen to it. The answer determines everything downstream.

Carl E. Sera, CMT, is president and managing principal of Sera Capital Management, a fee-only registered investment advisor in Annapolis, Md., specializing in tax-efficient exits for real estate investors and business owners.