Capital Gains Tax When Selling a Storage Facility: What to Expect
Key Takeaways
- Selling a self storage facility triggers multiple layers of federal tax: long-term capital gains (0%, 15%, or 20%), depreciation recapture (25%), and potentially the Net Investment Income Tax (3.8%).
- Depreciation recapture is the tax most owners forget about — and it can add hundreds of thousands of dollars to your tax bill.
- A worked example: selling a facility purchased for $1.5M (with $800K in depreciation claimed) at $4M could result in approximately $825,000 in federal taxes before state taxes.
- Tax minimization strategies include 1031 exchanges, installment sales, Opportunity Zones, and charitable trusts — but each has specific requirements and limitations.
- This is educational information, not tax advice. Always consult a qualified CPA or tax attorney before making decisions based on tax implications.
Important Disclaimer: This article provides general educational information about capital gains taxes as they relate to selling self storage facilities. It is not tax advice, legal advice, or a substitute for professional consultation. Tax laws are complex and change frequently. Individual circumstances vary significantly. Always consult a qualified CPA, tax attorney, or financial advisor before making any decisions based on tax considerations.
Let’s talk about the part of selling your self storage facility that nobody enjoys discussing: the taxes.
We’ve worked with dozens of sellers over the years, and the tax conversation almost always produces the same reaction — a mix of surprise, frustration, and urgency to find solutions. The surprise usually comes from one specific area: depreciation recapture.
Understanding your potential tax liability before you go to market isn’t just good planning — it fundamentally affects your decision-making. The net proceeds you walk away with (after taxes) are what actually matters, and that number can look very different from your gross sale price.
Here’s what you need to understand, explained in plain English with real numbers.
Federal Capital Gains Tax: The Foundation
When you sell a self storage facility for more than your adjusted cost basis, the profit is a capital gain. If you’ve owned the facility for more than one year (which is almost always the case), it’s a long-term capital gain and receives preferential tax treatment compared to ordinary income.
The federal long-term capital gains tax rates for 2026 are:
| Taxable Income (Single) | Taxable Income (Married Filing Jointly) | Capital Gains Rate |
|---|---|---|
| Up to ~$48,350 | Up to ~$96,700 | 0% |
| $48,351 – $533,400 | $96,701 – $600,050 | 15% |
| Over $533,400 | Over $600,050 | 20% |
Most self storage owners selling facilities worth millions of dollars will fall into the 20% bracket for their capital gains — both because the gain itself is large and because they typically have other income that pushes them into the highest tier.
Net Investment Income Tax (NIIT): The Surtax
On top of the standard capital gains rate, high-income taxpayers may owe an additional 3.8% Net Investment Income Tax (sometimes called the Medicare surtax).
The NIIT applies to the lesser of:
- Your net investment income, OR
- The amount by which your modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (married filing jointly)
For most self storage sellers, the gain from selling a facility will push them well above these thresholds, meaning the full 3.8% applies to the entire capital gain.
Effective federal rate for most sellers: 23.8% (20% capital gains + 3.8% NIIT)
But that’s not the whole picture. There’s another tax that catches many sellers off guard.
Depreciation Recapture: The One You Forgot About
This is the big one. If you’ve been depreciating your self storage facility on your tax returns — and if your accountant has been doing their job, you have — the IRS wants some of that depreciation back when you sell.
How Depreciation Works (Quick Refresher)
When you own a commercial property, you’re allowed to deduct a portion of the building’s value each year as a depreciation expense. This deduction reduces your taxable income during the years you own the property. For commercial real estate, the standard depreciation period is 39 years (27.5 years for residential).
Over 15 years of ownership, you might have claimed $800,000 or more in depreciation deductions on a self storage facility. Those deductions saved you real money on your taxes every year.
The Catch: When You Sell
When you sell the property, the IRS “recaptures” the benefit of those depreciation deductions. The accumulated depreciation reduces your cost basis in the property, which increases your taxable gain. And the portion of the gain attributable to depreciation is taxed at a special recapture rate of 25% — higher than the standard 20% long-term capital gains rate.
In other words, the tax deductions you enjoyed during ownership aren’t free. They’re a loan from the IRS that gets repaid at sale.
Why This Surprises Owners
Most owners are aware of their depreciation deductions — their accountant handles it, and they see the benefit on their tax returns each year. But many never connect the dots between those annual deductions and the eventual tax recapture at sale.
We’ve sat across the table from sellers who expected a $600,000 tax bill and learned it was actually $850,000 because they hadn’t accounted for depreciation recapture. That’s a significant difference that affects everything from pricing strategy to retirement planning.
State Capital Gains Taxes: The Variable
Beyond federal taxes, most states impose their own capital gains taxes. These vary dramatically:
- States with no income tax (and thus no capital gains tax): Texas, Florida, Wyoming, Nevada, South Dakota, Alaska, Washington, Tennessee, New Hampshire (limited)
- Low capital gains states: North Dakota (~2%), Arizona (~2.5%), Colorado (flat 4.4%)
- High capital gains states: California (up to 13.3%), New York (up to 10.9%), New Jersey (up to 10.75%), Oregon (up to 9.9%)
If you own a self storage facility in California and sell for a multi-million-dollar gain, you could owe an additional 13.3% in state capital gains taxes on top of your federal liability. That’s the difference between keeping 76% of your gain and keeping 63%.
State taxes are a critical variable in your planning. If you’re in a high-tax state, strategies like 1031 exchanges and installment sales become even more valuable.
Worked Example: A Real-World Tax Calculation
Let’s walk through a concrete example to illustrate how all these taxes interact.
The Scenario
- Original purchase price: $1,500,000 (15 years ago)
- Land value at purchase: $300,000 (land is not depreciable)
- Building value at purchase: $1,200,000
- Depreciation claimed over 15 years: $800,000 (roughly $53,333/year on the building and certain improvements, including some accelerated depreciation from cost segregation)
- Sale price: $4,000,000
Step 1: Calculate Adjusted Basis
Your adjusted basis is your original purchase price minus the depreciation you’ve claimed:
Adjusted Basis = $1,500,000 − $800,000 = $700,000
Step 2: Calculate Total Gain
Total Gain = Sale Price − Adjusted Basis = $4,000,000 − $700,000 = $3,300,000
Step 3: Separate the Gain Components
Your total gain has two components that are taxed differently:
- Depreciation Recapture: $800,000 (the amount of depreciation you claimed)
- Capital Gain (above original basis): $4,000,000 − $1,500,000 = $2,500,000
Step 4: Calculate Each Tax
Depreciation Recapture Tax: $800,000 × 25% = $200,000
Long-Term Capital Gains Tax: $2,500,000 × 20% = $500,000
Net Investment Income Tax (NIIT): $3,300,000 × 3.8% = $125,400
Step 5: Total Federal Tax
| Tax Component | Amount |
|---|---|
| Depreciation recapture (25%) | $200,000 |
| Capital gains (20%) | $500,000 |
| NIIT (3.8%) | $125,400 |
| Total Federal Tax | $825,400 |
Step 6: State Taxes (if applicable)
If this facility were in California: $3,300,000 × 13.3% = $439,000 in additional state taxes
Total in California: approximately $1,264,000 — nearly 32% of your sale proceeds.
If the facility were in Texas or Florida: $0 in state capital gains taxes.
Total in Texas/Florida: approximately $825,400 — about 21% of your sale proceeds.
The difference between those two scenarios is over $400,000 — a powerful illustration of why state taxes matter in your planning.
How to Minimize Your Tax Burden
Given the magnitude of these taxes, it’s no surprise that tax planning is a central part of any sophisticated self storage sale. Here are the most common strategies:
1031 Exchange: The Gold Standard
A 1031 exchange (named for Section 1031 of the Internal Revenue Code) allows you to defer all capital gains and depreciation recapture taxes by reinvesting your sale proceeds into a “like-kind” property.
Key requirements:
- You must identify replacement property within 45 days of closing
- You must close on the replacement property within 180 days
- The replacement property must be of equal or greater value
- You must use a qualified intermediary to hold the proceeds (you can never touch the money)
- The exchange must be for investment or business-use property (not personal use)
What this means in practice: Using our example above, a 1031 exchange could defer the entire $825,400 federal tax bill (plus any state taxes). That $825,400 stays invested and continues compounding rather than going to the IRS.
The catch: You’re deferring taxes, not eliminating them. When you eventually sell the replacement property (without another 1031 exchange), you’ll owe taxes on the accumulated gains. However, many investors use serial 1031 exchanges throughout their careers and ultimately benefit from a step-up in basis at death, potentially eliminating the deferred taxes entirely.
Installment Sale: Spreading the Pain
An installment sale allows you to spread the capital gain over multiple tax years by receiving payment over time rather than in a lump sum.
How it works: Instead of receiving $4 million at closing, you might receive $1 million at closing and $1 million per year for three additional years. Each payment is split proportionally between return of basis, capital gain, and interest income.
Advantages:
- Spreads the gain across multiple tax years, potentially keeping you in lower tax brackets
- Provides a steady income stream
- Reduces the immediate cash tax burden
Risks:
- You’re extending credit to the buyer — if they default, you may not receive full payment
- Interest rates on seller financing may be below what you could earn elsewhere
- You remain connected to the property (financially) for years after selling
Opportunity Zone Investment
If you invest capital gains into a Qualified Opportunity Zone Fund within 180 days of realizing the gain, you can:
- Defer the original capital gains tax until 2026 (or when you sell the Opportunity Zone investment)
- Reduce the deferred tax by 10–15% if you hold the investment long enough (some of these benefits have expired or been modified — consult your CPA)
- Eliminate taxes on any new gains from the Opportunity Zone investment if held for 10+ years
The catch: Opportunity Zone investments carry their own risks — they’re typically in economically distressed areas, and the quality of available investments varies enormously.
Charitable Remainder Trust (CRT)
A Charitable Remainder Trust allows you to donate appreciated property to a trust, receive an income stream for life (or a term of years), and ultimately benefit a charity with the remaining assets.
Tax benefits:
- No immediate capital gains tax on the sale (the trust sells the property tax-free)
- An upfront charitable deduction for the present value of the charitable remainder
- Income stream for life (or the specified term)
The trade-off: You’re giving up the principal. The assets ultimately go to charity, not to your heirs. This strategy works best for owners with philanthropic goals who need income rather than a lump sum.
Delaware Statutory Trust (DST)
A Delaware Statutory Trust is a popular 1031 exchange vehicle for sellers who want to defer taxes but don’t want the responsibility of actively managing replacement property.
How it works: You exchange into a DST that owns institutional-quality real estate managed by a professional sponsor. You receive passive income without management responsibilities.
Advantages: True passive investment, 1031 exchange-eligible, diversification possible
Disadvantages: Limited liquidity, management fees, less control over the underlying asset
Planning Your Exit: Start Early
The single most important piece of advice we can give you about taxes: start planning before you go to market.
Tax planning isn’t something you figure out at the closing table. The most effective strategies — particularly 1031 exchanges and installment sales — require advance preparation, qualified advisors, and specific timelines that begin running the moment your property sells.
Here’s what we recommend:
- Meet with your CPA 6–12 months before listing. Review your basis, accumulated depreciation, and projected tax liability. No surprises.
- Evaluate your options. Not every tax strategy is appropriate for every seller. Your CPA can help you understand which approaches align with your financial goals.
- If considering a 1031 exchange, start identifying replacement properties early. The 45-day identification window is extremely tight, and the pressure of finding suitable replacement property under deadline leads to poor decisions.
- Coordinate with your broker. We work closely with our sellers’ tax advisors to structure transactions that optimize after-tax proceeds. Deal timing, payment structure, and allocation of purchase price all affect your tax outcome.
The Bottom Line
Taxes are an unavoidable reality of selling a self storage facility. But the difference between paying $825,000 and paying $200,000 — or deferring the entire amount — comes down to planning.
Don’t let your tax liability be an afterthought. Understand it, plan for it, and work with qualified professionals to minimize it within the bounds of the law.
This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are complex and subject to change. Consult a qualified CPA, tax attorney, or financial advisor for advice specific to your situation.
Planning your exit? We work alongside tax advisors to help our clients structure transactions that maximize after-tax proceeds. Let’s start the conversation early — before you go to market.
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