The Self Storage Seller’s Tax Playbook: Beyond 1031 Exchanges

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Key Takeaways

• A 1031 exchange is the most well-known tax deferral tool — but it’s not the only one, and it’s not always the best one for your situation.
• Cost segregation studies can dramatically reduce your tax basis allocation, shifting more of your gain into lower-taxed categories and potentially unlocking additional depreciation before sale.
• Installment sales (Section 453) let you spread your tax liability across multiple years — reducing your effective tax rate without buying replacement property.
• Qualified Opportunity Zones offer partial and potentially full capital gains exclusion if you reinvest gains into designated development zones.
• Charitable Remainder Trusts can eliminate capital gains tax entirely while providing you a lifetime income stream — if you have charitable intent.
• Delaware Statutory Trusts (DSTs) combine 1031 exchange deferral with passive ownership — ideal for sellers who want out of active management.
• No single strategy is “best.” The right tax plan depends on your goals, your timeline, your other income, and your estate plan. This article is educational — you need a CRE-specialized CPA to build your specific strategy.

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When self storage owners think about the tax impact of selling their facility, the conversation almost always starts and ends with the same three words: “Do a 1031.”

And 1031 exchanges are powerful. We’ve covered them in detail in our comprehensive 1031 exchange guide. If you’re selling one self storage facility and buying another investment property, a 1031 exchange can defer your entire capital gains and depreciation recapture tax bill — potentially hundreds of thousands of dollars.

But here’s what most sellers don’t realize: a 1031 exchange isn’t always the right tool, and it’s definitely not the only one.

Some sellers don’t want to reinvest in more real estate. Some want cash flow, not another property to manage. Some are 68 years old, selling their life’s work, and the last thing they want is to be under a 45-day identification deadline shopping for a replacement property while their wife wants to start traveling.

For those sellers — and for sellers who want to combine multiple strategies for maximum tax efficiency — there’s a full playbook of options that most owners have never heard of.

We’re the team behind The Storage Brief. We’re brokers, not CPAs. What follows is educational information based on our experience working with sellers and their tax advisors. This is not tax advice. Every seller’s situation is different, and you absolutely must work with a qualified CPA and tax attorney to build your specific strategy.

With that said, let’s walk through the tools available.

The Tax Bill You’re Actually Facing

Before we get into strategies, let’s make sure you understand what you’re up against. When you sell a self storage facility, you potentially owe taxes on three separate components:

1. Capital Gains Tax

This is the tax on the profit from selling your property — the difference between your sale price and your adjusted cost basis.

• Federal long-term capital gains rate: 0%, 15%, or 20% depending on your income level. Most self storage sellers fall into the 15% or 20% bracket.
• Net Investment Income Tax (NIIT): An additional 3.8% surtax applies if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
• Combined federal capital gains rate for most sellers: 18.8% to 23.8%.

2. Depreciation Recapture

Every year you’ve owned the facility, you’ve taken depreciation deductions that reduced your taxable income. When you sell, the IRS “recaptures” that depreciation and taxes it at 25% — regardless of your income bracket.

This is the one that catches sellers off guard. If you’ve owned your facility for 20 years and taken $600,000 in depreciation, you owe $150,000 in recapture tax — on top of your capital gains tax. A 1031 exchange defers this too, but if you sell without exchanging, this is a mandatory hit.

3. State Income Tax

Depending on your state, you may owe an additional 0% to 13.3% in state capital gains tax.

• No state income tax: Texas, Florida, Tennessee, Nevada, Wyoming, Washington, South Dakota, Alaska, New Hampshire (limited)
• High state income tax: California (up to 13.3%), New York (up to 10.9%), New Jersey (up to 10.75%), Oregon (up to 9.9%)

Total potential tax rate: When you combine federal capital gains (20%), NIIT (3.8%), depreciation recapture (25% on the recapture portion), and state tax (0–13.3%), a seller in a high-tax state could face an effective total tax rate of 35–45% on their gain.

A Real-World Example

You sell your self storage facility for $4,000,000. Your adjusted cost basis (after 18 years of depreciation) is $1,500,000. You’ve taken $700,000 in total depreciation.

Tax Component	Taxable Amount	Tax Rate	Tax Owed
Capital Gains	$1,800,000 ($4M – $1.5M – $700K recapture)	23.8%	$428,400
Depreciation Recapture	$700,000	25%	$175,000
State Tax (e.g., 5%)	$2,500,000 (total gain)	5%	$125,000
Total Tax Bill			$728,400

That’s $728,400 in taxes on a $4 million sale. And this is a moderate-tax-state example. In California, that state line alone could exceed $300,000.

Now let’s talk about how to reduce it.

Strategy 1: Cost Segregation Study (Pre-Sale Optimization)

A cost segregation study isn’t a tax deferral strategy by itself — it’s a tool that can optimize your tax position both during ownership and at the time of sale.

What It Is

A cost segregation study is an engineering-based analysis that reclassifies components of your self storage facility from long-lived real property (39-year depreciation) to shorter-lived personal property or land improvements (5, 7, or 15-year depreciation).

Components that can often be reclassified:

• Security fencing and gates (15-year)
• Paving, curbing, and landscaping (15-year)
• Electrical systems dedicated to personal property (7-year)
• Security cameras and monitoring systems (5-year)
• Specialized door hardware and access controls (5-year or 7-year)
• Interior partition walls in climate-controlled buildings (7-year)
• Signage (7-year)

How It Helps Before a Sale

If you haven’t done a cost seg study, you can conduct one now — even retroactively — and claim accelerated depreciation combined with remaining bonus depreciation (40% in 2025, 20% in 2026, 0% in 2027 unless Congress extends). This can generate a large current-year deduction that offsets other income before your sale.

The trade-off: Additional depreciation increases your recapture liability at sale. But the accelerated deductions save you at your ordinary income rate (up to 37%), while recapture is taxed at 25%. If your income rate exceeds 25%, the timing arbitrage works in your favor.

Cost: $8,000–$15,000 for a typical self storage facility. The tax savings almost always exceed the cost by a significant multiple.

Who Should Consider This

• Owners who haven’t done a cost segregation study and are 12–24 months from selling
• Owners with significant other income they want to offset
• Facilities built or acquired in the last 10–15 years (older facilities have less remaining depreciable value to reclassify)

Strategy 2: Installment Sale (Section 453)

If you don’t want to do a 1031 exchange — maybe you don’t want to buy more real estate, or you want to retire — an installment sale is one of the most effective alternatives.

What It Is

An installment sale under Section 453 of the Internal Revenue Code allows you to spread the recognition of your capital gain over multiple tax years based on when you actually receive the payments. Instead of recognizing the entire gain in the year of sale, you only recognize the portion of gain attributable to the payments you receive each year.

How It Works

Instead of receiving the full purchase price at closing, the buyer pays you over time — typically 20–40% down, with the remainder paid over 5–15 years via a promissory note secured by a mortgage on the property.

Each payment consists of return of basis (not taxed), capital gain (taxed at capital gains rates), and interest income (taxed at ordinary income rates). By spreading the gain across years, you can stay in a lower capital gains bracket (15% instead of 20%), avoid the 3.8% NIIT by keeping income below $250,000/year, and manage Medicare IRMAA surcharges.

Example

You sell for $3,000,000 with $1,500,000 in total gain:

• Lump-sum sale: $1.5M gain × 23.8% = $357,000 in federal tax
• Installment sale over 10 years: $150K/year × 15% = $22,500/year → $225,000 total

Tax savings: $132,000 — simply by changing when you receive the money.

Risks and Limitations

• Buyer default risk. You’re effectively financing the buyer’s purchase. If they default, you have to foreclose on the property — which may have declined in value.
• You don’t get all your cash upfront. If you need the proceeds for another investment or retirement, waiting 10 years may not work.
• Depreciation recapture is not installment-eligible. The IRS requires you to recognize all depreciation recapture in the year of sale, regardless of whether you receive the payment. This means you’ll still owe the 25% recapture tax in year one.
• Interest rate risk. If you set a fixed interest rate on the note and rates rise, you’re earning below-market returns on your money.

Who Should Consider This

• Sellers who don’t want to buy replacement property
• Sellers in high-tax states who want to spread income across years
• Retirees who want a predictable income stream
• Sellers willing to accept some buyer default risk in exchange for significant tax savings

Strategy 3: Qualified Opportunity Zones (QOZ)

Qualified Opportunity Zones were created by the 2017 Tax Cuts and Jobs Act to incentivize investment in economically distressed communities. For self storage sellers, they offer a unique — and potentially powerful — capital gains deferral and exclusion tool.

What It Is

When you sell an asset at a gain, you can reinvest the capital gains (not the full proceeds — just the gain portion) into a Qualified Opportunity Fund (QOF) that invests in designated Opportunity Zones. There are over 8,700 designated zones across the United States.

The Tax Benefits (as of 2026)

• Deferral of original gain. By investing capital gains into a QOF, you defer the tax until the earlier of December 31, 2026 (the current sunset date) or the date you sell your QOF investment. Note: The 2026 deadline is current law — Congress may extend it, but plan based on existing rules.
• Exclusion of NEW gains on the QOF investment. If you hold your QOF investment for at least 10 years, any appreciation in the QOF investment is permanently tax-free. This is the big benefit that remains fully intact.

How It Works

You sell your facility, realize a capital gain, and within 180 days invest that gain into a Qualified Opportunity Fund. The QOF invests in designated Opportunity Zone projects — which could include self storage development. If you hold for 10+ years, any gains from the QOF investment itself are 100% tax-free.

Here’s what makes this interesting for storage sellers: many Opportunity Zones are in areas with growing storage demand. Some developers are building self storage inside OZs — meaning you could sell one facility, invest the gains into a QOF that builds another, and potentially eliminate taxes on the growth entirely.

Risks and Limitations

• Deferral deadline uncertainty. Under current law, the deferred gains must be recognized by December 31, 2026. Congressional extension is possible but not guaranteed.
• Investment risk. Opportunity Zone investments are real investments with real risk. The tax benefit doesn’t protect you from a bad investment.
• Illiquidity. To get the full exclusion benefit, you need to hold for 10 years. Your capital is locked up.
• Complexity. QOZ compliance requirements are significant. The fund must invest 90% of its assets in qualifying OZ property. Annual testing and IRS reporting are required.

Who Should Consider This

• Sellers with large capital gains who are willing to reinvest into a long-term, illiquid investment
• Sellers interested in continued real estate exposure (potentially in self storage) without the active management burden
• Sellers with a long time horizon (10+ years) who can benefit from the permanent gain exclusion
• Sellers whose CPAs confirm the deferral timeline still provides meaningful benefit

Strategy 4: Charitable Remainder Trust (CRT)

If you have charitable intent — or if you’re looking for a creative way to eliminate capital gains tax while generating lifetime income — a Charitable Remainder Trust may be worth exploring.

What It Is

A CRT is an irrevocable trust that you transfer your self storage facility into before the sale. The trust then sells the facility, pays no capital gains tax on the sale (because the trust is tax-exempt), and invests the full proceeds. You receive annual income from the trust for a set term (your lifetime or up to 20 years), and the remaining assets pass to a qualified charity upon your death or the end of the trust term.

The Tax Benefits

• No capital gains tax on the sale. The trust is a tax-exempt entity. When it sells the facility, it pays zero capital gains tax — the full proceeds are available for reinvestment.
• Income tax deduction. You receive a partial income tax deduction in the year you create the trust, based on the projected charitable remainder value. The deduction amount depends on your age, the payout rate, and IRS discount rates.
• Estate tax reduction. The assets in the CRT are removed from your taxable estate, potentially reducing estate taxes for your heirs.

How It Works

You transfer your facility into a CRT before a sale agreement exists (timing is critical — the IRS will disqualify pre-arranged sales). The trust sells the facility tax-free, invests the full proceeds, and pays you a fixed annuity or percentage of trust value annually. Upon your death or at term end, remaining assets pass to your designated charity.

The math: On a $4M facility with $1.5M in potential taxes, a direct sale leaves $2.5M to invest ($125K/year at 5%). A CRT invests the full $4M ($200K/year at 5%). That’s $75,000 more per year — $1.5 million over a 20-year retirement. You do pay ordinary income tax on distributions, but they’re spread over your lifetime at lower brackets. Plus you get a charitable deduction upfront.

Risks and Limitations

• Irrevocable. Once you transfer the property, you can’t take it back. The money eventually goes to charity — your heirs don’t receive the remainder.
• Income, not principal. You receive income from the trust, but you can’t access the principal.
• Complex and expensive to set up. Attorney fees, trustee fees, and ongoing administration costs typically run $10,000–$25,000+ upfront, plus annual management fees.
• You must have genuine charitable intent. The IRS scrutinizes CRTs for substance. The charitable remainder must be at least 10% of the initial fair market value.
• Timing is critical. The property must be transferred before a sale agreement exists. If the IRS determines the sale was pre-arranged, the trust is disregarded and you owe the full tax.

Who Should Consider This

• Sellers who want to support a charitable cause and have genuine philanthropic goals
• Sellers who value lifetime income over a lump sum
• Sellers whose estate plan doesn’t require passing the facility proceeds to heirs
• Sellers facing very large tax bills ($500K+) where the CRT income differential is substantial

Strategy 5: Delaware Statutory Trust (DST)

We touched on DSTs in our 1031 exchange guide, but they deserve deeper coverage here because they solve a specific problem that many sellers face: wanting the tax deferral of a 1031 exchange without the active management of another property.

What It Is

A DST is a legal entity that holds title to investment real estate. Multiple investors own fractional interests in the trust, which are treated as direct real estate ownership for tax purposes. This means DST interests qualify as replacement property in a 1031 exchange.

How It Works

You sell your facility, engage a Qualified Intermediary for a standard 1031 exchange, and invest the proceeds into one or more DST offerings instead of buying a specific property. The DST holds institutional-quality real estate managed by professional sponsors. You receive quarterly income distributions and depreciation pass-through without managing anything. When the DST sells (typically 5–10 years), you can do another 1031 or recognize the gain.

Why Sellers Love DSTs

• Full 1031 tax deferral — same as buying replacement property directly
• No management responsibility — professional sponsors handle everything
• Diversification — split your exchange across multiple DSTs in different asset classes and geographies
• Solves the 45-day identification problem — DST sponsors have inventory ready to go
• Lower minimums — many DSTs accept investments starting at $100,000

Example: Sell for $3M and invest $1.2M into a Dallas apartment DST, $1M into a Nashville medical office DST, and $800K into a Southeast storage portfolio DST. Total gain deferred, no management, three diversified income streams.

Risks and Limitations

• Illiquidity. DST interests have no active secondary market. You’re locked in for the hold period (typically 5–10 years).
• No control. You have no say in management decisions, capital expenditures, or the timing of sale. The sponsor makes all decisions.
• Sponsor risk. If the DST sponsor underperforms or the underlying property declines in value, your investment declines with it.
• Fees. DST sponsors charge upfront fees (typically 10–15% of invested capital) that reduce your effective investment. These fees are built into the offering but reduce your return compared to direct property ownership.
• Suitability requirements. Most DSTs are available only to accredited investors (net worth exceeding $1 million or income exceeding $200,000).

Who Should Consider This

• Sellers who want 1031 exchange tax deferral but don’t want to manage another property
• Retiring sellers who want passive income
• Sellers under 45-day identification deadline pressure who need a ready-to-go replacement option
• Sellers who want to diversify across multiple properties and asset types

Strategy 6: State-Specific Tax Planning

This is the least glamorous strategy — but it can save a significant amount of money, and almost nobody does it proactively.

The State Tax Landscape

Self storage sellers owe state income tax based on where the property is located, not where they personally reside (in most cases). If your facility is in California, you owe California state capital gains tax — even if you live in Texas.

However, state tax rules vary significantly:

• No state income tax states: Sellers of facilities in Florida, Texas, Tennessee, Nevada, Wyoming, South Dakota, Alaska, Washington, and New Hampshire (interest and dividends only) face no state capital gains tax.
• High-tax states: California (up to 13.3%), New York (up to 10.9%), New Jersey (up to 10.75%), Oregon (up to 9.9%), Minnesota (up to 9.85%), and others impose significant state-level taxes on real estate gains.

Strategies Worth Exploring

• Installment sales across state lines. If you sell a California facility and move to a no-income-tax state, installment payments received after establishing new residency may be taxed at the new state’s rate. California has clawback provisions — this requires careful CPA planning.
• State 1031 conformity. Most states conform to federal 1031 rules, but a few don’t fully. You could owe state tax even on a federally deferred exchange. Verify before you structure.
• Relocation timing. If you’re planning to relocate from a high-tax to a low-tax state, completing the move before the sale — with genuine residency documentation — can save hundreds of thousands.

Putting It All Together: The Combined Strategy

The most sophisticated sellers don’t use one strategy in isolation — they combine multiple approaches. Here are a few common combinations:

Combination 1: Cost Segregation + 1031 Exchange

Conduct a cost segregation study 12–18 months before selling. Claim the accelerated depreciation to offset other income. Then execute a 1031 exchange to defer the gain (including the increased recapture). Net result: current-year tax savings from the cost seg study plus full deferral on the sale.

Combination 2: Partial 1031 + Installment Sale

Exchange a portion of your proceeds into replacement property (or a DST) to defer part of the gain. Take the remaining proceeds as an installment sale over 10 years to spread the rest of the gain. This gives you tax deferral on part of the gain and tax management on the rest — while generating immediate income from the installment payments.

Combination 3: DST 1031 + State Relocation

Execute a 1031 exchange into DSTs (for full federal deferral). Relocate from a high-tax state to a no-tax state before the DSTs eventually liquidate and you recognize the deferred gain. When the gain is finally recognized, you pay state tax at your new state’s rate — potentially zero.

Combination 4: CRT + Life Insurance

For charitable sellers: transfer the facility to a CRT, generate tax-free income for life, and use a portion of the annual income to fund a life insurance policy. The insurance replaces the value that would have gone to heirs, while the charity receives the trust remainder.

Working with the Right CPA

Every strategy in this article requires professional tax guidance specific to your situation. You need a CPA who specializes in commercial real estate — not a generalist who does your personal returns.

What to look for: CRE transaction experience (ask how many real estate sales they’ve handled), self storage familiarity (depreciation allocations are unique), proactive planning (they should advise you 18 months before sale, not at tax time), and a network (1031 QIs, estate attorneys, DST sponsors, OZ advisors).

When to engage: 12–24 months before selling. Many strategies require advance planning, entity restructuring, or timing-specific filings. Our brokers always recommend sellers talk to their CPA before deciding to list — the tax implications should inform your timeline, structure, and sometimes even the decision of whether to sell now or wait.

Timing Strategies: When You Sell Matters

Simple timing moves can meaningfully affect your tax bill:

• January vs. December closing. Closing in January gives you an extra 15 months before the tax bill is due (April of the following year). On a $500K liability, that extra time invested can generate $30,000–$50,000.
• Low-income years. If your other income is unusually low — retirement transition, between investments, a loss year — that’s the ideal year to recognize the gain. Lower total income means a lower marginal rate.
• Capital loss harvesting. Losses from other investments (stocks, real estate) can offset the capital gains from your facility sale.

The Bottom Line

A 1031 exchange is a powerful tool — but it’s just one page in a much larger playbook. The sellers who keep the most money are the ones who plan early, work with specialized advisors, and build a tax strategy that reflects their actual goals: retirement income, estate planning, charitable giving, or continued real estate investment.

The worst thing you can do is wait until you’re under contract to think about taxes. The second-worst thing is to assume a 1031 exchange is your only option.

Start the conversation with a CRE-specialized CPA now. Bring them your goals, your timeline, and your financial picture. Let them build a strategy that keeps more of your sale proceeds working for you — legally, effectively, and aligned with how you actually want to live after you sell.

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