Short answer: You can pay the capital gains tax, do a partial exchange, use an installment sale, invest through a Delaware statutory trust or a 721 UPREIT, put gains into an opportunity zone fund, use a charitable remainder trust, or hold the property until death so your heirs get a stepped-up basis. Each trades control, liquidity or tax savings differently.
Reviewed by Jon Hilley. Last updated September 29, 2026.
If a 1031 exchange doesn't fit, you can pay the tax and move on, spread the gain with an installment sale, move into passive ownership through a Delaware statutory trust (still a 1031) or a 721 UPREIT contribution, invest gains in an opportunity zone fund, use a charitable remainder trust, or hold the property until death for a step-up in basis. Our guide to 1031 exchange alternatives compares them in depth.
Each option gives up something: control, liquidity, timing or the size of the tax bill. The right one depends on why the 1031 exchange isn't working for you, whether that's a tight timeline, no appealing replacement, or a wish to stop managing property.
Key rules
- Installment sale: spreads recognized gain over the years you receive payments, though depreciation recapture taxed as ordinary income is recognized in the year of sale (IRC §453, §453(i))
- Section 721 contribution: contributing property to a partnership, such as a REIT's operating partnership, in exchange for units is generally tax-free (IRC §721(a))
- Delaware statutory trust: a properly structured DST interest is treated as a direct interest in real property, so it qualifies as 1031 replacement property (Rev. Rul. 2004-86)
- Involuntary conversion: if property is condemned, destroyed or stolen, you can defer gain by reinvesting under a separate, more flexible statute (IRC §1033)
- Charitable remainder trust: a CRT can sell appreciated property without immediate tax at the trust level and pay you an income stream (IRC §664)
- Step-up at death: heirs generally receive a basis equal to fair market value at death, which eliminates the deferred gain (IRC §1014)
What are the main 1031 exchange options?
Pay the tax
Simple and flexible: you keep full control of the cash. Compare the after-tax result against an exchange with our capital gains vs 1031 comparison tool.
Do a partial exchange
You don't have to reinvest everything. Take some cash, pay tax on that portion, and defer the rest. It's often the middle ground between a full exchange and a taxable sale.
Installment sale
Seller financing under §453 lets you report gain as payments come in rather than all at once. You carry the buyer's credit risk, and the interest you earn is taxed as ordinary income.
DST or 721 UPREIT
A DST 1031 exchange is still a 1031 exchange, but it replaces active management with a passive, fractional interest. Tenant-in-common interests in real property can also qualify, with more control but shared decision-making (Rev. Proc. 2002-22 covers when the IRS will rule a TIC isn't a partnership). A 721 exchange goes a step further and converts property, often a DST interest several years later, into REIT operating partnership units. Once you hold OP units, you can't do another 1031 exchange, and converting them to REIT shares or selling them is taxable.
Opportunity zone fund
Investing capital gains in qualified opportunity zone funds under §1400Z-2 can defer and potentially reduce tax. The rules were extended and changed by 2025 legislation, with a new round starting in 2027, so confirm the current terms with your CPA before relying on them.
Charitable remainder trust
Useful if you're charitably inclined. You receive an income stream and a partial charitable deduction, and the remainder goes to charity instead of your heirs.
Move in, or hold until death
Moving into a rental can eventually let you use the §121 home sale exclusion, but it's reduced for nonqualified use, depreciation you claimed is still taxable, and property acquired in an exchange has a 5-year wait (IRC §121(d)(10)). If only part of a property was your home, such as a duplex where you live in one unit, Rev. Proc. 2005-14 lets you combine the §121 exclusion on the home portion with a 1031 exchange of the rental portion. Holding until death lets your heirs take a stepped-up basis under §1014, which is how many investors ultimately avoid the deferred gain for good.
Example: paying the tax vs. exchanging
- Net sale price: $1,000,000
- Adjusted basis ($800,000 cost minus $200,000 depreciation): $600,000
- Total gain: $400,000
- Tax on the depreciation portion ($200,000 × 25%): $50,000
- Tax on the remaining gain ($200,000 × 15%): $30,000
- Net investment income tax ($400,000 × 3.8%): $15,200
- Total federal tax if you sell outright: $95,200
- Cash left to reinvest after tax (no mortgage): $904,800
- Cash to reinvest in a full 1031 exchange: $1,000,000
Assumptions: 25% on unrecaptured §1250 gain and a 15% long-term capital gains rate, plus the 3.8% net investment income tax; state tax not included. Paying the tax leaves you $95,200 less to invest. Whether that's worth the freedom depends on what you'd buy, how long you'd hold and what you need the money for. An installment sale of the same property would spread the $400,000 of gain across the payment years instead of recognizing it all at once.
Other questions investors ask
What is better than a 1031 exchange?
No option is better for everyone. A 1031 exchange defers the most tax if you want to keep owning real estate. If you want out, an installment sale, charitable remainder trust or holding until death may fit better, and paying the tax may be the right call when the gain is small.
When should you not do a 1031 exchange?
Skip it when the gain is small, when you're selling at a loss (a loss can't be recognized in a 1031 exchange), when you need the cash, or when no replacement property makes sense within 180 days. We see investors regret buying a weak property just to save tax.
Can I sell my house after 2 years and not pay capital gains?
For your main home, often yes: if you owned and lived in it for 2 of the last 5 years, you can exclude up to $250,000 of gain, or $500,000 if married filing jointly (IRC §121). Depreciation from any rental period is still taxable, and a home acquired in a 1031 exchange must be owned 5 years first.
Common mistakes
- Deciding after the sale closes: We see investors who wanted to keep the exchange option open but didn't set one up before closing. Once you receive the proceeds, the 1031 route is gone. If you're unsure, set up the exchange first; if you don't buy, the funds are released under the QI release rules.
- Treating a DST or 721 as a simple swap: Both are securities-style investments with fees, illiquidity and no control. Review the offering documents with your own advisors.
- Assuming §1033 applies to a voluntary sale: The more generous involuntary conversion rules only apply to condemnation, casualty and theft.
