Selling a Self-Storage Facility

Selling Your Self-Storage Facility: Spread the Gain Across Years

Storage owners usually face appreciation on the land plus recapture of years of depreciation on buildings and equipment. A structured installment sale spreads most of it. Here is the math on a $4.5M facility, by state, and the pieces that stay in year one.

On a $4,500,000 self-storage facility with a $1,000,000 adjusted basis after $1,600,000 of depreciation, spreading the gain over 10 years cuts the total tax from $1,353,567 to $1,082,025 in California, and from $924,963 to $758,110 in a state that does not tax the gain. The $150,000 of gates, cameras, kiosks and signage is recapture taxed in year one either way.

Go deeper: the tax on paving, gates and buildings in a self storage sale on Big Sale Tax.

A $4.5M self-storage sale: all at once vs. spread over 10 years

Where you live	Tax if all of it lands in 2026	Tax if the gain is spread over 10 years	Difference	Tax due in year one when spread
California	$1,353,567	$1,082,025	$271,542	$176,097
New York	$1,268,322	$1,016,450	$251,872	$166,232
New Jersey	$1,270,413	$981,060	$289,353	$162,045
Massachusetts	$1,201,653	$933,110	$268,543	$155,401
Oregon	$1,271,463	$1,104,610	$166,853	$179,166
Hawaii (gain capped at 7.25%)	$1,184,338	$1,017,485	$166,853	$171,938
Illinois	$1,098,213	$931,360	$166,853	$155,158
Colorado	$1,078,963	$912,110	$166,853	$152,491
Texas, Florida, Washington and other states that do not tax this gain	$924,963	$758,110	$166,853	$131,151

Price: $4,500,000. Adjusted basis $1,000,000 after $1,600,000 of depreciation: $1,450,000 straight-line on buildings and paving (unrecaptured §1250 gain) and $150,000 on gates, cameras, kiosks and signage (§1245, year one).

How these were run: married filing jointly, $150,000 of other taxable income every year, an investor (not a real estate professional), so the 3.8% net investment income tax applies; 2026 federal and state tables applied to every year; federal alternative minimum tax included. In the spread version the whole price is paid in 10 equal annual installments and the unrecaptured §1250 gain is recognized first, as Treas. Reg. §1.453-12 requires. Washington's capital gains excise does not apply to real estate. Interest on the unpaid balance is extra ordinary income and is not in these figures. Same engine as our calculator, so you can rerun it with your own numbers.

Before you read further

What is the tax bill on your sale going to be?

Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.

No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.

What is specific to a self-storage sale

§1250 vs §1245. Buildings, paving and building systems are §1250 property. Access gates, security cameras, kiosks, signage, office equipment and anything a cost segregation study moved to 5 or 7-year lives are §1245: ordinary income in the year of sale.
Ancillary income lines (tenant protection plans, truck rental agreements, retail sales) may be valued separately. Payments tied to those contracts can be ordinary income; keep them separate from the price of the real estate.
REIT buyers and operating partnership units. Some institutional buyers offer units instead of cash (a §721 contribution). That defers the unit portion under partnership rules; the cash portion can be structured.
Manager's apartment. If you lived on site, the §121 exclusion may cover part of that unit's gain. Most owners did not.

What can be spread, and what is taxed in year one anyway

Appreciation on land and buildings: long-term capital gain, taxed federally at 0%, 15% or 20%. Spread across the payment schedule.
Unrecaptured §1250 gain (the straight-line depreciation you took on buildings and other real property): taxed federally at up to 25%. It is also spread, but it comes out first, in the earliest payments (Treas. Reg. §1.453-12).
Recapture income (§1245 personal property, and any depreciation on real property above straight line, such as bonus depreciation on land improvements): ordinary income in the year of sale, even if no cash arrives that year (IRC §453(i)). A cost segregation study moves more of the price into this bucket.
Interest on the deferred payments: ordinary income each year it is paid.

How the price is allocated between land, buildings, land improvements and personal property decides how much lands in each bucket, so settle it in the purchase agreement.

Structured installment sale or 1031 exchange?

A 1031 exchange defers the whole gain, recapture included, but only if you buy more real estate of equal or greater value and keep owning it. A structured installment sale fits when you want out: retiring, simplifying an estate, or done with tenants and debt. The two also combine. If you exchange part of the proceeds, cash you take at closing is taxable boot in the year of sale, while the part paid out under a structured installment sale is reported as it arrives. If an exchange is already under way, the exchange agreement limits when you can touch the money (Treas. Reg. §1.1031(k)-1(g)(6)), so talk to your qualified intermediary and CPA before changing course.

The rules that keep the deferral intact

The $5 million line (§453A). If more than $5,000,000 of installment notes from sales over $150,000 are outstanding at year end, an annual interest charge applies to the deferred tax on the excess. Many structures are sized to stay under it.
No borrowing against the note (§453A(d)). Pledging the installment obligation as collateral is treated as receiving payment.
Related buyers (§453(e)). If you sell to a related person and they resell within two years, the deferral can accelerate.
Electing out is a one-way door (§453(d)). The election is due with the return and can be revoked only with IRS consent.
Earn-outs. A price that depends on future results is a contingent payment sale: with a stated maximum price, basis is recovered as if the maximum is paid; with only a fixed period, evenly over that period; with neither, over 15 years (Treas. Reg. §15a.453-1(c)).

How the structured version works

The buyer pays the full price at closing. The part you choose to defer goes to an assignment company, which funds your payment schedule with a fixed annuity from a highly rated life insurer. You pick the schedule: level payments, a delayed start, a lump in a later year, or a mix. The buyer gets clean title on day one; you get a contract for future payments instead of one large taxable check. Your CPA reports each year's gain on Form 6252.

The trade-off, stated once: money you defer is not available to spend or invest elsewhere until each payment arrives, and the schedule is fixed once it is funded. Most sellers defer part of the price and keep the rest as cash at closing.

When it fits

A large gain after a long hold, including years of depreciation.
You want to exit real estate rather than exchange into more of it.
The buyer pays cash at closing (all-cash or bank-financed).
The purchase agreement is not signed yet, or can still be amended, so the assignment step can be written in.

When it does not

You plan a full 1031 into replacement property.
Most of the gain is recapture income from a cost segregation study, so it is taxed in year one anyway.
You need every dollar of the proceeds in year one.

Find out what your sale is really going to cost you in tax, and what you can do about it

No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.

Find out what your tax bill actually looks like before you sell, including the parts your CPA may not raise until the return is already being prepared.

Most people find out what they owe after the sale closes, when nothing can be changed. A short conversation now tells you the number, which layers apply to your situation, and which options are still open while the sale is still in front of you.

What you will actually owe: federal, the 3.8% surtax, recapture and your state
Which of those layers you can still do something about
Whether spreading the sale changes the number in your case

Hans Goldstein · 213-414-2808 · Hans Goldstein: Tax & Exit Planning · This is an educational conversation, not tax advice. Bring your CPA in before you file.

Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.

Frequently asked

Q: A REIT offered operating partnership units. Do I still need a structured installment sale?
A: Maybe for part of it. Contributing the property for partnership units can defer the gain under partnership rules. Any cash in the deal is taxable, and that cash portion can be structured.

Q: Is the climate control system recaptured in year one?
A: Building HVAC is generally a structural component of the building, so it is §1250 property and its straight-line depreciation can be spread. Items like gates, cameras, kiosks and signage that were depreciated as personal property are §1245 recapture, taxed in year one.

Q: I am exchanging into a bigger facility. Should I consider this?
A: If a 1031 covers the whole gain and you want to stay in storage, the exchange usually wins. A structured installment sale fits when you are cashing out.

Q: Is there a minimum size?
A: Insurer minimums start around $100,000 of deferred proceeds.

No retainer and no fee to you. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans's share is about 2.4%; no trail). It is built into the annuity pricing.

Educational, not tax or legal advice. 2026 figures. Your CPA or attorney should confirm the allocation, character and reporting for your sale.