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Selling Rental Property in Retirement: Taxes, Timing, IRMAA

By Hans Goldstein · Updated 2026-09-27

Selling rental property in retirement is taxed like any rental sale, but the timing is different: your wages have stopped, so the gain lands on top of pensions and Social Security instead of a salary. That can make one big sale more expensive than it looks, through the 20% bracket, the 3.8% net investment income tax and Medicare IRMAA surcharges two years later. It can also free years of suspended passive losses. Whether to sell, keep, exchange or spread the sale depends on how those pieces stack for you.

Four paths for a retiree's rental

No path is right for everyone. Holding for the step-up is hard to beat on taxes if you can manage the property and your heirs want it. Selling is often right when the work, the health picture or the concentration risk has changed.

How the sale is taxed

Every rental sale has the same layers:

1. §1245 recapture on any cost-segregated components: ordinary income, taxed in the year of sale even on an installment sale (§453(i)).
2. Unrecaptured §1250 gain, the building depreciation you took: taxed at your ordinary rate, capped at 25% (§1(h)(1)(E)).
3. Long-term capital gain on the rest: 0%, 15% or 20%. For 2026 joint filers, 0% applies up to $98,900 of taxable income and 15% up to $613,700 (Rev. Proc. 2025-32 §3.03).
4. NIIT of 3.8% on the lesser of net investment income or modified AGI above $250,000 for a joint return (§1411(b)(1)).
5. State tax. California taxes all capital gain as ordinary income.

Retirement changes where the layers fall. With lower other income, more of the gain can land in the 15% band instead of 20%, and more of the unrecaptured §1250 gain can be taxed below 25%. The depreciation recapture article walks through the layers in detail.

A simple example: one year or five

Simple example (2026 married filing jointly, federal only, figures computed with the §1(h)(1) worksheet ordering). A retired couple has $100,000 of taxable income from pensions and taxable Social Security after the standard deduction (modified AGI about $132,200). They sell a rental with a $600,000 gain: $150,000 unrecaptured §1250 gain and $450,000 long-term capital gain, no §1245 recapture.

Sell for cash, all in 2026:

• Added federal income tax: $105,507 (of the capital gain, $363,700 falls at 15% and $86,300 at 20%)
• NIIT: $18,324 (3.8% of modified AGI over $250,000)
• Total: about $123,800

Installment sale, $120,000 of gain a year for five years. Under Reg. §1.453-12 the unrecaptured §1250 gain comes out first:

Spreading saves about $5,000 of federal income tax and about $17,900 of NIIT here, roughly $22,900 in total, before time value. The example ignores interest on the note, which is taxable as ordinary income and is net investment income, and it ignores state tax and IRMAA. It also assumes the couple's other income stays flat. The point is the shape, not the precise figure: spreading keeps each year's modified AGI near the $250,000 NIIT threshold and out of the 20% band.

IRMAA: the Medicare surcharge two years later

Medicare Part B and Part D premiums rise with income. The surcharge, IRMAA, uses your modified AGI from two years earlier (42 U.S.C. §1395r(i)(4)(B)(i)), so a 2026 sale shows up in 2028 premiums.

Verified 2026 figures (CMS): the standard Part B premium is $202.90 a month, and the surcharges start above $218,000 of modified AGI for joint filers ($109,000 single). The top tier starts at $750,000 joint ($500,000 single), where Part B totals $689.90 a month per person.

Two points retirees miss:

• A voluntary sale does not qualify for relief. Under 20 CFR §418.1205(e), loss of income-producing property counts as a life-changing event only if it is "not at the direction of you or your spouse (e.g., due to the sale or transfer of the property)." You cannot ask Social Security to ignore a year with a big sale.
• Spreading helps because each year stands alone. In the example above, a cash sale puts modified AGI near $732,000 for one year. Spreading keeps it near $252,000 a year, still above the first tier but far below the top. Our sister site covers the details in does capital gains affect IRMAA.

Taxable Social Security also depends on income. The §86 thresholds for joint filers ($32,000 and $44,000) are not indexed, so a sale of any size usually pushes the taxable share of benefits to the 85% maximum in that year.

Suspended losses: the retiree's hidden asset

Many retired landlords have years of passive losses stuck on Form 8582. With a property manager, most retirees do not materially participate, and above $150,000 of modified AGI the $25,000 allowance is gone. The losses carry forward.

Selling helps in two ways:

• The sale gain is passive, so it absorbs suspended losses from the same and other passive activities.
• Selling your entire interest in the activity to an unrelated buyer in a fully taxable sale releases that activity's remaining losses under §469(g)(1)(A). With an installment sale, §469(g)(3) releases them in proportion to the gain recognized each year.

Watch the entire-interest rule. If your rentals are grouped as one activity, selling one building may not release its losses.

Case 2: The Tired Landlords (illustrative)

The book's Case 2 is an illustrative composite. A retired California couple, 69 and 67, with $140,000 a year of pensions and Social Security, owns eight rentals run by a property manager. They sell the fourplex and keep seven that throw off about $70,000 a year of paper losses, plus $260,000 already stuck on Form 8582.

Illustrative inputs: sale $2.20 million, selling costs 5.5%, paid plus improvements $520,000, depreciation taken $240,000, loan paid off at closing $150,000. Total gain: $1.80 million. Structured portion: $1.40 million over 8 years.

Illustrative result: about $263,000 ahead after 10 years, $208,000 of it from spreading alone and the rest from the kept rentals' losses meeting the gain year by year. The loan paid off at closing is treated as a year-1 payment. The case uses a structured installment sale; seller financing on the same schedule produces the same tax timing, with the buyer's credit as the risk instead. The structured version adds no buyer credit risk and no early payoff: the buyer pays in full at closing, and an assignment company pays the seller on the chosen schedule, usually funded by a fixed annuity from a highly rated life insurer. What to know: the payments are locked in, they depend on the assignment company and the life insurer behind it, this specific structure has no published IRS ruling so a CPA should review the documents, and the commission is built into pricing.

When to sell

A few signals that it is time, from a tax view:

• Your suspended losses are large and your other passive income is small.
• You no longer want to manage, and a 1031 replacement would just be another property to manage.
• You can take payments over time and don't need all the cash at once.
• Your income will stay low for several years, keeping each year's gain in the lower brackets.

And a few for holding: poor health with heirs who want the property (the step-up), little suspended loss, or a need to stay under an IRMAA tier you are close to.

Bottom line

Selling rental property in retirement means the gain stacks on pensions and Social Security instead of a salary. One large year can hit the 20% bracket, NIIT and IRMAA at once, while spreading the gain can keep each year lower and release suspended losses in step. Compare holding, exchanging, selling and spreading with real numbers before you list. The free book works through Case 2 in full, and the calculator compares cash, seller financing and a structured sale.

Questions to ask your CPA

1. What is my gain by layer: §1245 recapture, unrecaptured §1250 and capital gain?
2. How much federal and California suspended loss do I have, and which activity does it belong to?
3. Are my rentals grouped as one activity, and would selling one building release its losses?
4. What would my modified AGI be each year under a cash sale versus an installment sale, for NIIT and IRMAA?
5. How would holding until death compare, given the step-up and the loss cut under §469(g)(2)?
6. If I take a note, how will the interest be taxed and how secure is the buyer?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.