Selling a Rental Property in the Sacramento Region: 1031 Exchange or Cash Out?

A 1031 exchange, named for section 1031 of the tax code, lets you sell investment real estate and buy other investment real estate without recognizing the gain that year. The tax is deferred, not erased.

The IRS Instructions for Form 8824 (2025; page reviewed April 30, 2026) set the rules:

• Real property only. For 2018 and later, like-kind exchange treatment applies only to real property held for use in a trade or business or for investment. Property held mainly for sale, like a flip, doesn't qualify.
• 45 days to identify. You must identify the replacement property in writing no later than 45 days after you transfer the property you're selling.
• 180 days to close. You must receive the replacement by the earlier of the 180th day after the transfer or the due date, including extensions, of your tax return for that year.
• Cash or other property. If you receive money or other property that isn't like-kind, gain is recognized up to that amount.

The IRS page on like-kind exchanges for real estate (reviewed May 1, 2026) adds that real property is generally like-kind to other real property, improved or unimproved. A rental house can be exchanged for an apartment building or land. U.S. property isn't like-kind to property outside the U.S.

The deadlines are strict, so the search starts before the sale, not after. A plan that works:

1. Talk to your CPA and pick a QI before you list.
2. Decide what the replacement should do. More income, less upkeep, a different city, room to grow.
3. Start touring and analyzing replacements while your property is on the market. Our guide on how to evaluate a rental shows how we run the numbers.
4. Write the exchange into your sale contract the way your QI asks.
5. Line up the loan early. Investment loans usually need more down and more reserves. Maggie is a mortgage broker and can shop the replacement loan across a network of approved lenders, or you can use any lender you like. Our DSCR loan page covers one common investor option.

Watch the tax return trap. A sale late in the year can run into the return due date before the 180th day unless you extend the return. Our 1031 exchange page shows how one team runs both sides on one calendar.

When you sell a rental without an exchange, there are usually two federal pieces of gain, plus California's own tax, which your CPA figures:

• Depreciation recapture. The depreciation you took, or could have taken, comes back. IRS Topic No. 409 (last reviewed September 24, 2026) says unrecaptured section 1250 gain from selling real property is taxed at a maximum 25% rate.
• The rest of the gain. If you held the property more than a year, it's a long-term capital gain, taxed at the long-term rates for your income. Topic No. 409 also points higher-income owners to the net investment income tax.

A worked example in words: you bought a rental for $250,000 and claimed $60,000 of depreciation, so your adjusted basis is $190,000. You sell for $640,000 and pay $40,000 in selling costs, so you net $600,000. Your gain is $410,000. Of that, $60,000 is the depreciation piece, taxed at up to 25%, and $350,000 is long-term gain. Your CPA figures the actual tax.

Cashing out isn't wrong. It gives you simplicity, cash in hand and an end to landlord work. Some owners would rather pay the tax and be done. The point is to see the number before you choose.

Tenants change how the sale works. You may sell to an investor with the lease in place, or wait for the home to be vacant so you can prep it for a homeowner buyer. Showings need proper notice, and California has rules on ending a tenancy.

Our guide on selling a house with tenants covers notice, showings, cash for keys and which buyers pay more. If the home needs work after the tenants move out, our turnkey home prep handles repairs before you list. For the investor side of the search, see our investment property page.