Is Your Building Your Biggest Retirement Asset? Is Selling for Cash the Best Move?

Many successful business owners I work with purchased a functional building decades ago that has quietly become one of their most valuable assets. The purchase in many cases began as a practical decision to control occupancy costs or accommodate business growth and now represents millions of dollars in accumulated equity.

In some cases the building is owned debt-free but in most cases, the building has appreciated considerably and the business is fully established now. After 10, 20, or even 30+ years of ownership, retirement or succession planning is becoming a priority now or over the next couple of years.

Selling the building outright is a familiar option for most. However, depending on an owner’s financial objectives, several alternatives may offer stronger income preservation, tax benefits, or transition to provide a more ‘hands-off’ stream of income.

I am outlining a few strategies that deserve consideration before making a final decision however all should be evaluated with your professional team of wealth or tax advisors, attorneys, and real estate professionals.

1. Conventional Sale with a ‘Clean’ Exit

The amount a building sells for and the amount an owner ultimately keeps are two different numbers.

For some owners, the certainty of a cash sale outweighs the tax and other costs associated. Others may benefit from considering a different structure. The timing of a transaction can be a significant factor. For example, if there has been significant appreciation in the value of the property and the owner would like to redirect those funds into a new business investment. There are many real-world examples of ‘holding on’ too long or where timing is more valuable than the equity.

As complex as transactions can get, a traditional real estate sale is straightforward mechanically when we break it down to core outcomes. A buyer purchases the property, the seller receives the proceeds, and ownership transfers at closing.

For owners prioritizing immediate access to capital, simplicity, or a complete exit from real estate ownership, this may be the most practical approach.

As a real-world example, consider an owner who purchased an industrial building 10 years ago for $2.2 million. Today, the property is worth $6.4 million to $6.6 million, roughly three times its original purchase price. That is about a 191% to 200% increase in property value, before accounting for income, improvements, financing, expenses, or taxes. The price difference alone is $4.2 million to $4.4 million; taxable gain and the resulting tax bill depend on adjusted tax basis, selling expenses, and the owner’s circumstances. The owner weighed the certainty of a cash sale against the tax cost, considering asset consolidation, retirement, and opportunities to reinvest the liquid net proceeds in other businesses.

Federal taxes on a sale may include capital gains taxes, taxes associated with prior depreciation, and, in some cases, the net investment income tax. Depreciation-related gain is not all taxed the same way: unrecaptured Section 1250 gain differs from ordinary-income depreciation recapture. State income taxes may also apply. Transfer and recordation taxes and other closing costs vary by jurisdiction and contract terms, including how those costs are allocated between buyer and seller.

The message here is that the property’s original purchase price is not necessarily its current tax basis or the only factor when considering what the seller’s net proceeds or ‘take-home’ amount is. Depreciation, qualifying improvements, and other adjustments can materially change the taxable gain and transaction costs are factored in with appropriate local and asset-specific information factored in.

2. Seller Financing: Turn Your Property Into an Income Stream

Higher borrowing costs can make purchasing more difficult for buyers. Seller financing, sometimes called a seller carryback, allows a property owner to act as the lender for part or all of the purchase price. This type of arrangement can be mutually beneficial with the proper structure and team in place.

At baseline, rather than collecting the entire purchase price net of fees and taxes at closing, the seller receives a negotiated down payment and accepts principal and interest payments over time, based on the terms agreed to between buyer and seller.

Consider a simplified example:

The former owner no longer manages the building but receives payments under a promissory note, ideally secured by a properly documented mortgage or deed of trust. This structure relies heavily on clarity of payment terms and a well-structured process handled with the help of an attorney.

Beyond creating a mutually beneficial structure through the term, interest rate, and down payment, there can be a tax advantage for the seller. Under Internal Revenue Code Section 453, an eligible installment sale generally allows qualifying gain to be recognized as principal payments are received rather than entirely in the year of sale. At least one payment must be received after the tax year of the sale for installment-sale treatment.

For example, assuming the building has a $1 million adjusted tax basis, no debt, no selling expenses, and no ordinary-income depreciation recapture, its $3 million gain represents 75% of the sale price.

Under those simplified assumptions, the $1 million down payment would generate $750,000 of recognized installment-sale gain, with eligible remaining gain recognized as future principal payments are collected. In layman’s terms, eligible gain can be recognized and taxed over time. Interest is taxed separately, generally as ordinary income. Interest adds to total cash receipts, but whether seller financing improves the seller’s economic outcome depends on taxes, inflation, payment timing, default risk, and alternative uses of the money.

Actual tax results can differ significantly, and sellers should work with a qualified tax team on planning and execution. Ordinary-income depreciation recapture generally must be recognized in the year of sale, even if principal payments arrive later. Existing debt, the down payment, related-party rules, and the note’s interest terms can also affect the result.

Seller financing also introduces a different risk: the owner is taking on borrower credit-risk.

The buyer’s financial strength, size of down payment, interest rate, loan security, amortization schedule, and potential balloon payment are all deal-structure and risk considerations. A default of the buyer could require enforcement or foreclosure proceedings, creating costs for the seller and also potentially returning the seller to property ownership.

For an owner seeking recurring income, seller financing can be attractive, but only when the financial return adequately compensates for the risk.

3. A 1031 Exchange: Changing Properties and Deferring the Gain

A Section 1031 like-kind exchange allows an owner to exchange qualifying investment or business-use real estate for other qualifying real estate while generally deferring recognition of gain, provided specific requirements are satisfied. Property held primarily for sale does not qualify.

Consider an owner who has operated in a facility for 20–30 years, maintaining the building and paying off debt. The owner may have a substantial gain that could be deferred through a properly structured 1031 like-kind exchange. For a conventional deferred exchange, the structure, commonly involving an independent qualified intermediary, should be established before closing. Receiving or controlling the sale proceeds can jeopardize deferral. Naturally, the prospect of postponing a large tax bill is appealing.

A common pitfall: A private building owner’s desire to defer taxes can begin driving a tax-focused decision rather than supporting an overall sound business decision.

After the original property is transferred, the owner generally has 45 days to identify qualifying replacement real estate in writing. The replacement property must be received by the earlier of 180 days after that transfer or the due date of the owner’s tax return for the year of transfer, including extensions. These deadlines can introduce pressure, especially if the search is limited to property listed on the open market. An owner who spent decades making disciplined real estate decisions may suddenly feel compelled to acquire a property with a less attractive return, questionable tenant credit, looming capital expenses, or an inflated purchase price.

However, the risk doesn't end with the property selection.

The identity of the taxpayer, ownership structure, exchange documentation, and handling of sale proceeds all matter. Common assumptions about holding periods or entity restructurings may not accurately reflect the law. Even the financial safeguards used by the qualified intermediary holding the proceeds deserve careful investigation.

Cash or other nonqualifying consideration received, including certain net debt relief, may result in taxable gain even when the exchange otherwise qualifies. Tax deferral also does not remove the risks or management needs of the replacement investment.

Illustrative: Deferring a $1,500,000 tax liability provides little comfort if the replacement investment destroys $2,000,000 in value. This is a hypothetical illustration, not an after-tax comparison of specific investments.

A successful 1031 exchange is not simply one that satisfies IRS requirements. It should also leave the owner with an investment that makes financial sense more broadly.

For property owners, here is a guiding question:

Would you buy the replacement property if the tax benefit didn't exist?

4. An UPREIT Contribution: Exchange for Interest in a Larger Real Estate Portfolio

A far lesser known alternative is an UPREIT, short for Umbrella Partnership Real Estate Investment Trust. In a qualifying UPREIT transaction, a property owner contributes real estate to the operating partnership associated with a Real Estate Investment Trust (REIT).

In exchange for a contribution, the owner receives operating partnership interests, commonly called OP units, rather than receiving the entire property’s value in cash. Under Internal Revenue Code Section 721, qualifying contributions of property to partnerships in exchange for partnership interests generally do not trigger immediate recognition of gain.

OP Units can be an interesting opportunity because depending on the specific arrangement, benefits may include:

• Potential deferral of capital gains upon contribution.
• Exposure to a larger collection of properties.
• Reduced day-to-day property management responsibility.
• Potential recurring cash distributions.
• Possible future liquidity through OP-unit redemption or exchange rights.

However, there are important limitations.

An UPREIT is not simply a tax-free sale, and OP units are not the same as cash or freely tradable REIT shares.

The operating partnership must be willing to accept the property. The owner’s ability to redeem or transfer units depends on the governing agreements, and a subsequent redemption or exchange may trigger taxable gain.

Existing mortgage liabilities, changes in the owner’s share of partnership debt, cash distributions, and disguised-sale rules can also cause gain to be recognized. OP units are partnership interests, not qualifying Section 1031 replacement real estate; a Section 721 contribution follows different rules.

Under Section 704(c), the property’s built-in gain generally remains attributable to the contributing owner. If the partnership later sells the property in a taxable transaction, that owner may be allocated taxable gain without a corresponding cash distribution. The owner also assumes exposure to the REIT’s management decisions, debt levels, portfolio performance, and financial condition. Distributions are not guaranteed, and a larger property portfolio does not necessarily diversify risk across markets or property types. For owners seeking a more passive investment, the structure may warrant investigation.

You may surrender control of the property without surrendering the tax liability associated with it. Owners can sometimes negotiate tax protection agreements addressing specified taxable dispositions, debt-related protections, or compensation for breaches. Their scope, duration, exceptions, and remedies are contractual and must be reviewed carefully; they do not guarantee continued deferral or give the owner control over every future transaction.

Before contributing a building, ask: What are the OP units worth? How easily can they be converted into cash? Who controls transactions that could trigger my deferred gain? And what happens when the tax protections expire?

But the quality of the investment and the specific terms of the OP units should matter just as much as the possibility of tax deferral.

Which Strategy Makes the Most Sense?

There is no universal answer.

Consider two owners with similarly valued warehouse buildings.

One wants to retire, eliminate financial obligations, and purchase a second home. A conventional sale may be ideal.

Another wants continued income but no longer wishes to manage roof replacements, property taxes, maintenance, or tenant improvements. Seller financing, a carefully selected replacement property, or an UPREIT contribution might better support those objectives.

Business owners face an added consideration: What happens to the operating business if the real estate changes hands?

Buildings can be sold while the business continues to operate through a negotiated sale-leaseback. Alternatively, ownership of the operating business and real estate might transfer separately or at different times.

Lease terms, condition of the building, occupancy costs, financing arrangements, and property ownership structure can significantly influence the economics of those decisions. Recently, we evaluated a property where our analysis indicated that the existing lease with the operating business reduced the estimated sale value by approximately 30% compared with the value under market lease terms. That was a property-specific estimate, not a general rule. When a lease is in place and a building sale is being contemplated, it is important to have experienced advisers evaluate both the building and the lease.

Real estate owned personally, through an LLC, partnership, or corporation may also present materially different tax consequences. All of these issues are best addressed before a property is placed on the market or being negotiated with a neighbor.

The Best Exit Strategy Starts Before the Sale

Too often, property owners focus almost exclusively on maximizing the sale price.

That is understandable. But for someone approaching retirement or transferring a family business, the more important measure may be the amount of after-tax wealth available, the income it can produce, and the risks attached to receiving it.

A thoughtful evaluation starts with three questions:

1. What is the property worth in today’s market?
2. What are the owner’s financial needs, tax considerations, and long-term objectives?
3. Which transaction structure offers the most appropriate balance of liquidity, income, control, and risk?

The answers should help guide the decision, not the other way around.

Making an Informed Real Estate Decision

Tax treatment, legal structure, investment suitability, and estate planning should then be evaluated with the appropriate qualified professionals.