Updated September 28, 2026
The 1031-versus-straight-sale decision gets most of the attention, and understandably — it's the bigger fork in the road. What gets less attention is the question that comes right after a seller decides to take the taxable sale: now what? The 45-day exchange clock is gone, the pressure to identify a replacement property is gone, and the seller is sitting with a wire transfer and no deadline. What sellers actually do with that money, once the tax bill is paid, follows a more consistent pattern than most people expect.
This sounds obvious, but it's worth stating plainly because sellers sometimes plan around the gross number instead of the net one. A straight sale triggers federal capital gains, California state tax, and depreciation recapture — combined, roughly 35 to 40 percent of the gain on a significantly appreciated property, plus California's withholding taken out at closing as a prepayment against that liability. Say, purely as a round illustration, a seller nets several million dollars after the mortgage payoff and before tax — the actual spendable, reinvestable amount is meaningfully smaller once the return is filed. Plan from the after-tax number, not the closing statement number.
Some sellers use a straight sale as the moment to genuinely diversify out of concentrated real estate exposure — into a balanced portfolio of stocks and bonds, a private business investment, or simply liquidity they've never had before after years of being asset-rich and cash-poor. This is a financial planning conversation, not a real estate one, and it belongs with a fee-based financial advisor or CPA who can model your actual tax position, income needs, and risk tolerance. The building was one asset class among many; a taxable sale is often the first real opportunity in years to look at the whole picture.
A meaningful number of sellers who skip the 1031 still end up back in real estate — just on their own timeline instead of the 45-day identification window and the 180-day close. Without the exchange clock, a seller can wait for the right deal instead of the available one, consider asset classes or geographies the exchange's like-kind rules would have made awkward, or take a passive position in a syndication without exchange-specific structuring requirements. The tax cost of skipping the exchange sometimes buys exactly the patience that produces a better replacement asset than a rushed 1031 would have.
Some sellers, particularly those near or in retirement, use part of the proceeds to generate income directly instead of chasing appreciation in a new asset. What that looks like varies enormously by the seller's age, tax situation, and existing income sources, and it is squarely a conversation for a financial advisor rather than a broker — the right structure depends on variables a real estate transaction doesn't touch.
Here's the honest tension worth naming. Sellers who deliberately choose the straight sale to escape the 1031's rigid timeline sometimes turn around and rush into a replacement property anyway, out of habit or discomfort holding cash. That defeats the entire point of skipping the exchange. If you paid the tax specifically to buy yourself time and flexibility, using that flexibility to make a snap decision under self-imposed pressure wastes the thing you paid for.
In practice, most sellers who skip the 1031 don't pick one option — they split the proceeds. A portion goes to genuine diversification outside real estate. A portion goes toward a real estate purchase made without deadline pressure, often months later once the right opportunity actually appears. A portion sits in reserve, because having liquidity after years of being illiquid is, for many sellers, the actual point of the sale — not the next acquisition. The seller who treats the whole proceeds as "must be redeployed immediately" is usually recreating the exchange pressure they just paid to avoid.
This entire conversation only matters if you've actually decided to sell in the first place, and the full process for selling a multifamily property in Los Angeles is the same whether you end up doing a 1031 or not — pricing, marketing, and escrow don't change based on what you plan to do with the proceeds afterward. What does change is the conversation you should be having with your broker and your CPA well before you're in escrow. A seller who waits until after closing to think seriously about where the money is going is negotiating the sale itself with less clarity than one who has already mapped out the after-tax plan, because knowing your actual objective for the proceeds sometimes changes what price and terms are worth accepting in the first place.
Sellers spend weeks negotiating price and terms on the building, then spend an afternoon deciding what to do with several million dollars of proceeds because the sale is finally behind them and they're tired of thinking about it. That's backwards. The proceeds decision has a longer time horizon and, in many cases, more total financial consequence than the last few points of negotiated price on the building. Treat the after-tax deployment plan with the same seriousness you brought to the sale itself, ideally with the same lead time — decided in principle before closing, not improvised in the weeks after.
Some sellers who initially plan to skip the exchange later realize a passive structure like a DST fits their income needs better than either a taxable sale or an active replacement property. If that's a live option for you, it's worth comparing before you commit to paying the tax — the DST path defers the liability while removing the management burden a direct replacement would carry. And if the reinvestment question comes down to capital-gains exposure specifically, whether reinvesting the proceeds avoids the tax is worth reading before you assume reinvestment alone changes your liability outside a proper exchange.
Paying the tax is sometimes the smartest investment a seller makes — not because the tax itself has any upside, but because of what it buys: the freedom to not be rushed into a replacement property within forty-five days by a market that doesn't know or care what your actual goals are. Sellers who plan what the after-tax money is actually for, before the wire lands, make better decisions with it than sellers who let the decision get made by default while the cash sits in an account.
Do I have to reinvest the proceeds to avoid tax after selling?
No — that's the point of a straight sale. The tax is paid at closing (via withholding) and on your return; reinvesting afterward doesn't undo that unless it's structured as a proper 1031 exchange from the start.
Is it smarter to always do a 1031 if I plan to buy more real estate anyway?
Not necessarily. If you plan to buy real estate on your own timeline rather than within the 45/180-day exchange windows, paying the tax and buying without the clock sometimes produces a better outcome than a rushed exchange into an available-but-not-ideal replacement.
What should I do with the money first?
Confirm the actual after-tax number with your CPA before making any commitments. Sellers who plan against the gross closing figure are often surprised by how much smaller the deployable amount is once the return is filed.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
Thinking about selling? Get a no-obligation evaluation on your building.
Request Free Evaluation →