How to Build a Multifamily Exit Strategy

This article is for someone who owns a multifamily property, or is about to, and needs to decide what happens at the end of the hold. It covers the paths available, the arithmetic that separates them, the tax questions to take to an adviser, and a fully worked hypothetical you can reproduce with a spreadsheet.

The short answer

An exit strategy is not a prediction about when the market will peak. Nobody can identify the best moment to sell in advance, and any article, adviser or piece of software that offers to is describing something that does not exist. What you can do is build the decision so that it is made on figures you can check rather than on a feeling about the cycle.

That means three things. First, know what the property is worth to a buyer today, which is your projected net operating income divided by the cap rate a buyer would apply — and know that the cap rate is an assumption, not a fact. Second, know what you would actually net after selling costs, the loan payoff and any prepayment cost, which is usually a good deal less than owners expect. Third, compare that number against what continuing to hold is projected to produce, using the same assumptions on both sides.

The comparison narrows the decision. It does not settle it, because every figure in it rests on assumptions you chose, and a modest change in the exit cap rate can outweigh several years of rent growth. The worked example below shows exactly that: two paths that look close, and a single input that reverses which one wins.

What a multifamily exit strategy actually is

An exit strategy is a written answer to four questions, decided in advance and revisited as facts change:

1. What has to be true for us to sell? Not "when the market is strong" — a number. A price, a projected internal rate of return, a debt maturity, a partner's liquidity need, a capital expenditure you are unwilling to fund.
2. What do we do if that is not true at the end of the intended hold? This is the question most plans skip, and it is the one that gets tested.
3. Who has to agree? Lender consent, partner or member approval, and any purchase option or right of first refusal a tenant or ground lessor holds.
4. What does the exit cost? Brokerage and closing costs, prepayment cost, deferred maintenance a buyer will price, and the tax bill you will owe on a gain you have not yet computed.

Notice what is absent. There is no market call in that list. A plan built around identifying the top of a cycle is not a plan; it is a wish with a spreadsheet attached.

Why the exit belongs in the acquisition underwriting

The exit assumption is not something you turn to in year five. It is one of the inputs that determines what you can justify paying on day one, and it belongs in the underwriting you do before you make an offer.

The mechanism is simple. A multifamily property is valued by capitalizing its net operating income, so your projected sale price is exit NOI divided by exit cap rate. Both terms are forecasts you are making about a date years away. If you underwrite an exit cap rate equal to the one you are buying at, you have assumed the market will treat the building exactly as well when you sell as it does today — an assumption that is invisible unless you write it down, and one that quietly does a lot of work.

Two consequences follow, and they are the reason to decide the exit early rather than late.

• A quarter-point move in the exit cap rate changes the sale price by more than a year of ordinary rent growth on most stabilized deals. The example below shows it: at a 5.75% exit cap, $904,234 of NOI capitalizes to $15,725,805. At 6.00% the same NOI is worth $15,070,563 — a $655,242 difference from one assumption, against $26,337 of NOI growth in the final year.
• Improvements are capitalized only to the extent they raise durable NOI. A renovation that lifts rents by $50 a unit across 48 units adds $28,800 of gross annual rent; net of the vacancy and expense load it might add $22,000 of NOI, which at a 5.75% cap is roughly $382,600 of value. Whether that is a good trade depends entirely on what the work cost and whether the rent holds — not on whether the property "shows better".

Write the exit assumption down at acquisition, and you will notice when the deal only works because of it.

The exit paths

There are fewer genuine options than most articles suggest, and one of the commonly listed ones is not an exit at all.

1. Sell the property

The only path that actually ends the investment and converts it to cash. It crystallizes the result, ends your exposure to the asset, and triggers the tax consequences discussed below. Everything else on this list defers one or more of those three things.

What determines the outcome is not the headline price but the net: sale price, less selling costs, less the loan payoff, less any prepayment cost. Owners routinely misjudge this by six figures because the payoff and the prepayment cost are not on the marketing flyer.

2. Refinance and continue holding

Frequently listed as an exit strategy. It is not one. A refinance changes your financing and returns some cash; it does not end the investment, does not realize the gain, and does not remove a single risk you were carrying the day before. You still own the building, and you now owe more against it.

The point worth internalizing: refinance proceeds are borrowed money, not profit. Cash released by a refinance is generally not a taxable event, which is what makes it attractive, but it is a liability you have to service out of the same NOI. Treating it as a return is the single most common error in this area, and it shows up in the arithmetic as a lower coverage ratio, thinner cash flow, and a larger balance to retire when you eventually do sell.

A refinance is also not automatically available in the size you want. Lenders size the new loan against several constraints at once — a maximum loan-to-value, a minimum debt service coverage ratio, a minimum debt yield — and you get the smallest of them. When rates are above your in-place rate, the coverage test usually binds before the loan-to-value test does, and a property with substantial equity can support far less new debt than the equity suggests. The worked example demonstrates this.

3. Hold without refinancing

Doing nothing is a decision, and it deserves to be evaluated like one. Holding keeps a below-market fixed-rate loan in place, avoids selling costs and prepayment cost, avoids a tax event, and continues to amortize the balance — which is a real, if unglamorous, source of return.

It is not free. You carry the operating risk, the capital expenditure that is coming, the interest-rate risk at maturity, and the illiquidity. And an in-place loan that looks like an asset today is a maturity you must refinance or repay on a date already written in the note.

4. Recapitalize or bring in new equity

A recapitalization replaces some or all of the existing equity with new equity while the property continues to be held — for example, new investors buy out the original limited partners, or a partner sells their interest to the remaining partners.

This is a real path and it is how many partnerships resolve a mismatch between one investor who needs liquidity and others who want to continue. Two cautions. It requires a defensible valuation of the interest being bought, which is the same exit-value question in a different costume. And selling interests in a partnership or LLC to new investors is an offer of securities, with its own body of federal and state law that has nothing to do with real estate. Get securities counsel before you plan one, not after.

5. Sell and complete a like-kind exchange under Section 1031

A sale followed by a reinvestment structured to defer the gain. It is a sale — the property goes, a buyer pays, the loan is repaid — with a tax treatment attached, and it succeeds or fails on strict timing. The details are in the tax section below, and the one-line version is that a 1031 exchange defers recognition of gain when the requirements are met. It does not eliminate tax.

6. Transfer or restructure ownership

Gifting interests, contributing the property to another entity, or holding until death so heirs take a stepped-up basis are all real things people do, and all of them are estate and tax planning rather than investment strategy. They belong in a conversation with an estate attorney and a CPA who know your circumstances. This article does not cover them, and any article that gives you a rule of thumb on them is doing you a disservice.

A decision framework

Which path fits is largely determined by facts you already have, not by a market view. This table is DealWorthIt editorial judgment about how the paths line up, offered as a starting point rather than as a rule.

Run the arithmetic for at least the top two rows that apply to you. A framework tells you where to look; it does not tell you the answer.

The numbers that decide it

These are the figures worth computing before any exit conversation. Each one is a calculation from inputs you can verify, not an opinion.

Two cautions on IRR, because it is the figure most often quoted and most often wrong. It is only as complete as the cash flows behind it: leave out a capital call, a prepayment cost or a selling expense and it improves for no reason. And a projected IRR is arithmetic performed on assumptions — it describes a scenario, not an outcome.

What to reassess about the market and the property

You cannot forecast the market. You can check whether the assumptions underneath your exit still hold, which is a different and more useful exercise. Each item below is answerable from evidence rather than opinion.

• In-place rents against current asking rents in the submarket. Not a rent index — the actual competing properties. If your rent roll has drifted below market, the gap is value you have not captured. If it has drifted above, your exit NOI is optimistic.
• New supply delivering nearby. Permits and units under construction within your competitive radius are public and knowable, and they affect rents on a schedule you can read.
• Concessions. Free rent and reduced deposits do not appear in asking rents but do appear in your effective income and in a buyer's underwriting.
• Expense trajectory. Insurance and property taxes have their own dynamics independent of the rental market, and a reassessment on sale can change a buyer's NOI materially. Compare your trailing twelve-month statement against the prior year line by line.
• Deferred capital. Roofs, plumbing risers, parking surfaces and unit interiors. Work you defer does not disappear; it gets priced by a buyer, generally less generously than you would price it.
• Your loan's maturity and prepayment schedule. Both are dates already written down. Neither is a market question.
• The cost of debt for a buyer. This is the market condition that most directly affects your price, because a buyer's bid is constrained by what they can borrow. Note the distinction that matters: a published benchmark such as SOFR or a Treasury par yield is not a borrower's rate. An actual loan is priced at a benchmark plus a spread that depends on the asset, the sponsor, the leverage and the lender. Read benchmarks from their publishers — the New York Fed for SOFR, the U.S. Treasury for par yields — and treat any quoted all-in rate as specific to the deal it came from.

What none of this produces is a signal to sell. It produces a more honest set of inputs, which is the most any analysis can offer.

Partners, lenders and the people who can veto you

A surprising number of exits are delayed not by the market but by a document nobody re-read. Before you engage a broker, establish the following in writing.

• Who authorizes a sale. The partnership agreement or operating agreement will specify it — a majority in interest, a supermajority, a unanimous vote, or the manager acting alone. Find out before you market the property, not after you have an offer.
• Whether any partner holds a right of first refusal, a buy-sell trigger, or a put right that a sale would activate.
• What the waterfall actually does at this price. A preferred return that has accrued, a promote that only vests above a hurdle, and a capital account that must be returned first all change who receives what. The distribution at a $15 million sale is not proportionally the distribution at $14 million.
• Lender consent. Most commercial loans restrict transfer of the property and of interests in the borrowing entity. A recapitalization can trip a due-on-sale or change-of-control provision even though the building itself does not change hands.
• Whether the debt is assumable, and on what terms. When your in-place rate is below market, an assumable loan is worth real money to a buyer and belongs in the marketing. When it is not, assumption is a complication rather than a feature.
• What you owe investors and when. Investors who were told a five-year hold deserve to hear about a change from you before they hear it from a broker. This is a relationship question, not a legal one, and it is the one people handle worst.

If you are the sponsor, remember that what you tell current investors about a sale, a refinance or a recapitalization is a communication about their investment. Say what you know, distinguish it from what you expect, and do not describe a projection as a result.

Tax questions to take to a qualified adviser

This section summarizes published federal material with citations so you can ask better questions. It is not tax advice, and it does not compute anyone's tax. What you actually owe depends on your ownership structure, holding period, prior depreciation, debt, state law and personal circumstances — none of which an article can know.

How the gain is figured

Gain is the amount realized minus the adjusted basis. The IRS defines amount realized as "all the money you receive plus the fair market value … of all property or services you receive," and selling expenses reduce it. Adjusted basis is "your original cost or other basis increased by certain additions and decreased by certain deductions" (IRS Publication 544).

The consequence that surprises owners: depreciation you claimed while you held the property is one of those deductions. It reduced your taxable income each year, and it reduces your basis, so it increases the gain on sale. A property you have held for a decade can produce a taxable gain substantially larger than the difference between what you paid and what you sold for.

The pieces the gain can break into

A gain on investment real property is generally not one number taxed at one rate. Ask your adviser to break it into its components, because they are taxed differently:

• Long-term capital gain. "Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term," and long-term rates of 0%, 15% or 20% apply depending on taxable income (IRS Topic no. 409).
• Unrecaptured section 1250 gain — broadly, the part of the gain attributable to depreciation previously taken on the real property. The IRS states it "is taxed at a maximum 25% rate" (Topic no. 409). Read maximum literally: 25% is a ceiling rather than the rate every seller pays, and a taxpayer whose ordinary rate is lower is taxed at the lower one. This is the component most often left out of an owner's mental arithmetic.
• The net investment income tax. A 3.8% tax applies to the smaller of net investment income or the amount by which modified adjusted gross income exceeds a statutory threshold — $200,000 for single or head of household, $250,000 for married filing jointly or a qualifying surviving spouse, and $125,000 for married filing separately. Net investment income "includes … capital gains, rental and royalty income" (IRS). Below the threshold no NIIT is due at all, so this is not a tax every investor owes on every sale, and whether a particular investor's rental activity and sale gain fall inside or outside it turns on facts that page does not resolve — which is exactly the kind of question to put to a CPA.
• State tax. Entirely outside the scope of this article and frequently significant.

Section 1031 like-kind exchanges

A 1031 exchange defers recognition of gain when its requirements are met. The IRS describes Form 8824 as figuring "the amount of gain deferred" — the tax is postponed into the replacement property's basis, not forgiven. These are the constraints, from the Instructions for Form 8824:

• Real property only. "For 2018 and later years, section 1031 like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale."
• 45 days to identify. Replacement property must be designated in writing "No later than 45 days after the date you transferred the property you gave up." The clock starts at closing, and it does not stop for a holiday or a failed deal.
• 180 days to close. The replacement "must be received within 180 days, or by the due date of your tax return (including extensions), whichever is earlier." The two periods run concurrently, not consecutively.
• A qualified intermediary. Using one is described as "one safe harbor" for a deferred exchange, and the intermediary cannot be "your agent at the time of the transaction or a person related to you." If you take actual or constructive receipt of the proceeds, there is no exchange.
• Related parties get two more years of exposure. If you or the related party disposes of exchanged property "before the date that is 2 years after the last transfer that was part of the exchange, the deferred gain or (loss) … must be reported."
• Geography. "Real property in the United States and real property outside the United States aren't like-kind properties."
• Cash kept and debt shed are recognized. An exchange is not all-or-nothing. The Instructions for Form 8824 build the recognized amount from "Any cash paid to you by the other party", the fair market value of non-like-kind property received, and "Net liabilities assumed by the other party" — so sale proceeds you keep, and mortgage debt that comes off without being replaced, produce taxable gain even when the rest of the exchange qualifies. On a leveraged multifamily sale this is the condition owners underestimate.
• An interest in a partnership or LLC is not real property. Section 1031 reaches real property, not an ownership interest in the entity that holds it, so a member who wants to exchange out of a jointly owned deal is proposing to exchange the wrong asset. Restructuring around that is a question for counsel and a CPA well before the property is under contract, not at closing.

The practical consequence of the 45-day rule is that a 1031 exchange has to be planned before you accept an offer, not after you close. An investor who decides to exchange on the day of closing has already spent none of the 45 days and all of the preparation time.

Installment sales

An installment sale is "a sale of property where you receive at least one payment after the tax year of the sale" (IRS Publication 537), and it spreads gain recognition across the years you are paid. One rule catches sellers of depreciated property: "you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year." The recapture is not spread. Installment reporting is also unavailable for some dispositions — the dealer rule "applies to real property held for sale to customers in the ordinary course of a trade or business" — so confirm it is open to you before structuring a sale around it. Publication 537 also has a section on interest on deferred tax.

Suspended passive losses

If losses from the property have been suspended under the passive activity rules, disposing of your entire interest in a fully taxable transaction to an unrelated party generally releases them — the Instructions for Form 8582 state that on such a disposition "your losses allocable to the activity for the year aren't limited by the PAL rules." Whether your losses are suspended, and whether a particular transaction qualifies, is a question for your adviser.

Take all of the above to a CPA who can see your returns. The purpose of this section is to make sure you know which questions exist.

Sale-readiness and due-diligence checklist

What a buyer will ask for, and what you should have in order before the first tour. Assembling this early shortens diligence and removes the surprises that reprice a deal at the last minute.

1. Trailing twelve-month operating statement, reconciled to the general ledger, with one-time items identified rather than buried.
2. Current rent roll with lease start and end dates, actual rents, concessions, deposits, delinquency and unit status — matching the T12, not approximately matching it.
3. All leases and addenda, plus any corporate, subsidized or short-term agreements that are not standard.
4. Three years of property tax bills and the current assessment, plus the reassessment rules in your jurisdiction. A buyer will underwrite their tax bill, not yours.
5. Insurance loss runs, typically five years.
6. Service contracts and their termination provisions — laundry, cable, landscaping, pest, waste. Some survive a sale whether you like it or not.
7. Capital expenditure history and open items, with invoices. What you spent supports the story; what you deferred will be found.
8. Utility bills and any submetering or ratio-billing arrangement, with the supporting documentation.
9. Loan documents, including the prepayment provisions, assumption provisions, transfer restrictions and the exact maturity date.
10. Entity documents: operating or partnership agreement, the authorization to sell, and the waterfall as it will actually apply at the contemplated price.
11. Environmental, structural and code records, including any open violations.
12. A pre-marketing walk of every unit. Not a sample. A buyer will walk them, and it is better that the first surprise is yours.

Our due-diligence guide covers the buyer's side of the same process, which is a useful way to see what your file will be tested against.

A worked example: sell, refinance, or hold

Every figure below is invented. There is no property, no customer and no transaction. The purpose is to show the arithmetic end to end so you can run it with your own numbers. This is not typical, not a projection of what any investment will do, and not a recommendation.

The situation: an owner of a hypothetical 48-unit property is at a decision point and comparing three paths over the next five years — sell now, refinance and hold, or hold with the existing loan and sell in five years.

Inputs

Payments amortize monthly using the standard annuity formula; balances are run month by month. From these inputs, the existing loan pays $37,394.06 a month, or $448,728.72 a year, which puts in-place DSCR at 780,000 ÷ 448,728.72 = 1.7382× and in-place debt yield at 780,000 ÷ 7,200,000 = 10.8333%. Growing NOI at 3% gives $803,400.00, $827,502.00, $852,327.06, $877,896.87 and $904,233.78 for years 1 through 5.

Path A — sell now

Sale price is the trailing NOI capitalized at the exit cap rate: 780,000 ÷ 0.0575 = $13,565,217.39. From that:

Note the gap: a headline value of $13.57 million produces $5.81 million of cash, before any tax. Path A has exactly one cash flow, so it has no internal rate of return — an IRR requires at least one outflow and one inflow. Quoting one for a sell-now scenario would be arithmetic theatre.

Path B — refinance and hold five years

First, size the loan. Note that the refinance valuation cap rate (6.00%) is set above the exit cap rate (5.75%): a lender underwriting its own collateral generally values it more conservatively than a buyer bidding for it, and the gap between those two assumptions is itself a choice you are making. A lender applies every test and lends the smallest result:

The coverage test binds, at $8,445,435.66 — below both the loan-to-value and debt-yield caps. This is the point about refinancing worth carrying away: the property is worth $13 million on the lender's own valuation and carries only $7.2 million of debt, yet the new loan is capped by what the income covers, not by the equity.

The new loan pays $52,000.00 a month, or $624,000.00 a year — which is DSCR of exactly 1.2500× and debt yield of 9.2358%, both at their limits by construction. Annual debt service has risen by $175,271.28 to release $944,981.30 of cash.

Path C — hold with the existing loan

No transaction, no cost, no prepayment penalty. Debt service stays at $448,728.72 and the balance keeps amortizing, reaching $6,406,421.94 at the end of year 5 against Path B's $7,882,736.67.

The year-5 sale, common to both hold paths

Year-5 NOI of $904,233.78 at a 5.75% exit cap is $15,725,804.83, with selling costs of $393,145.12 and no prepayment penalty. Netting each path's balance:

Comparing them

Paths B and C are forward decisions measured against the cash Path A would put in your hand. The capital you have at risk at the decision point is the net proceeds you give up by not selling, less any cash a refinance releases:

• Path B: $5,810,086.96 − $944,981.30 = $4,865,105.65
• Path C: $5,810,086.96

This is where refinance proceeds are usually mishandled. They enter as a reduction in the capital you have exposed, not as a gain. Annual cash flow is NOI less debt service less capital expenditure, and year 5 adds that path's net sale proceeds.

Equity multiple is total distributions divided by capital at risk at year 0; cash-on-cash is the year-1 cash flow over the same denominator. On these inputs, holding the existing loan wins on all three measures — and the reason is entirely the 4.25% in-place rate. The refinance releases $944,981 of cash but buys it with $175,271 of additional annual debt service and a balance that amortizes more slowly, and the two together cost more than the released cash is worth over five years.

One input reverses it

Change the existing loan's rate from 4.25% to 7.00% and hold every other input fixed:

Path B does not move, because it does not depend on the old rate — only on the balance being retired. What changes is the value of keeping the in-place loan. A single assumption, moved within a plausible range, reverses the conclusion. That is the honest lesson of the whole exercise: comparing computed outcomes narrows a decision, it does not identify an objectively correct exit.

What this example leaves out

Taxes are excluded entirely, and the direction of that simplification matters. A sale triggers tax; a refinance generally does not. Path A's proceeds are the denominator for both hold paths, so excluding tax makes that denominator larger than the cash you would really have, which understates the returns to staying invested. Also excluded: any sponsor promote or waterfall, asset-management and disposition fees, lease-up or occupancy ramps, per-line expense growth, reserve balances recovered at sale, and any return on the refinance proceeds once received. Add any of them and the numbers change.

What DealWorthIt can and cannot do

Stated against the same standard as everything else in this article, with the plan gates named. These were verified against the application source code rather than a pricing page.

What it does. You supply or select the assumptions — hold period, exit cap rate, selling-cost rate, growth rates, financing terms — and the software computes the scenario those assumptions describe. Sale proceeds follow the same identity used above: sale price = exit NOI ÷ exit cap rate, then gross proceeds = sale price + remaining reserves − selling cost − loan payoff − prepayment penalty. You choose whether the capitalized figure is trailing NOI for the hold year or forward NOI for the following year. Refinance proceeds follow new loan − existing balance − prepayment penalty − refinance cost, with the new loan lender-sized and the binding constraint among LTV, minimum DSCR and minimum debt yield named in the report — which is the sizing the worked example reproduces. Prepayment penalties are modelled as a per-year step-down schedule applied to either the original loan amount or the current balance. Outputs include IRR, equity multiple, cash-on-cash, DSCR and debt yield, and a five-by-five sensitivity grid over exit cap rate and income growth that can display IRR, equity multiple or sale proceeds.

What is gated. A hold period, an exit cap rate and a selling-cost rate are editable on any active plan. Refinance modeling requires Gold or Diamond — the refinance fields are blocked on every write path with that message. The detailed Growth & Exit Assumptions section, additional scenarios, scenario comparison, document import, investor splits and the detailed report and its PDF also require Gold or Diamond. Team collaboration is Diamond only. Gates are anchored to the deal owner's plan, not the viewer's.

What it does not do, stated plainly because the previous version of this article said otherwise. It does not identify a best or optimal moment to sell, and no such capability exists — nothing in the product searches across hold years, exit cap rates or financing structures to pick one out. It does not predict the future, recommend that you sell or hold, produce an appraisal or a valuation, or provide investment, legal, brokerage or tax advice. It does not verify that your rent roll or operating statement is accurate. It does not model income tax of any kind: every figure it produces is pre-tax, with no capital gains, depreciation recapture, Section 1031 or installment-sale treatment anywhere in the product. And it does not model yield maintenance or defeasance — if your loan carries either, compute that cost from your loan documents and enter it.

What it is for is narrower and more useful: making the arithmetic reproducible, so that a disagreement about an exit becomes a disagreement about assumptions, which is a conversation you can actually have.

Frequently asked questions

What is the best time to sell a multifamily property?

There is no answer to this question that anyone can give in advance, and treat with suspicion anyone who offers one. Market peaks are identifiable in hindsight. What you can establish is whether the price available today, net of costs, payoff and tax, beats what continuing to hold is projected to produce on the same assumptions — and how much that comparison changes when you move the assumptions. That is a narrower question and it has an answer.

How long should I hold a multifamily property?

Long enough for the business plan to finish, and no rule of thumb beyond that. One tax fact is worth knowing: the IRS treats a gain as long-term if you held the asset "more than one year," so the long-term rate is reached in a year, not in five or ten. Holding longer does not reduce the capital gains rate, and it increases accumulated depreciation, which increases the gain. Hold because the asset is still producing, not because of a number someone quoted you.

Is a 1031 exchange a way to avoid capital gains tax?

No — it defers recognition of gain when the requirements are met. The IRS describes Form 8824 as figuring "the amount of gain deferred": the deferred gain carries into the replacement property's basis and surfaces on a later taxable disposition. Deferral has real value, and it is not elimination. The requirements are strict — real property only rather than an interest in the entity that owns it, 45 days to identify, 180 days to close, a qualified intermediary you do not control, and a two-year exposure on related-party exchanges — and they have to be planned before you accept an offer. Deferral is also partial where you keep cash or shed debt without replacing it: that much is recognized now.

Is cash from a refinance tax-free?

Loan proceeds are generally not treated as income, which is why a cash-out refinance is often described as tax-free. Two qualifications matter. It is borrowed money, not a return: you owe it back with interest, out of the same NOI. And "generally" is doing real work in that sentence — the interaction of debt with your basis and capital account can produce consequences in a partnership that surprise people. Ask your CPA before you plan around it.

Why is my net sale proceeds figure so much lower than the sale price?

Because four things come out of it: selling costs, the remaining loan balance, any prepayment cost, and then tax. In the worked example above a $13,565,217 sale price produces $5,810,087 of cash before tax — the payoff alone is $7.2 million. Compute the net before you form an opinion about the price.

Should I refinance instead of selling?

It depends on the comparison, and the example above shows it running both ways on a single input. A refinance is worth examining when your in-place rate is at or above what you would borrow at now, when the property comfortably covers larger debt, and when you want to stay invested. It is usually poor when you hold a below-market fixed-rate loan, because you are retiring cheap debt to take on expensive debt and paying a prepayment penalty for the privilege. Note also that a refinance is not an exit — it changes your financing and leaves every other risk where it was.

How much of a refinance can I actually get?

The smallest of what the loan-to-value cap, the debt service coverage minimum and the debt yield minimum allow. When borrowing rates are high relative to cap rates, coverage typically binds first, and a property with substantial equity can support far less new debt than the equity implies — in the example, a $13 million valuation with $7.2 million of debt supports a new loan of only $8.45 million because coverage caps it there.

What is a prepayment penalty going to cost me?

Whatever your loan documents say, and the forms differ enormously. A step-down penalty is a declining percentage — read which balance it applies to, the original amount or the current one, because they diverge over time. Yield maintenance and defeasance are different mechanisms whose cost depends on prevailing rates at payoff and can be far larger. None of these is estimable from an article. Pull the note and ask your lender for a payoff quote as of your target date.

Do I need a broker to sell?

Not necessarily, and this article does not recommend any particular firm or platform. What a broker is being paid for is buyer access, a competitive process and transaction management. Judge any candidate on comparable transactions they have actually closed in your submarket and asset type, on what their fee covers, and on whether they will tell you something you do not want to hear about your price.

What if my partners disagree about selling?

Read the operating or partnership agreement first — it will say who decides, and that is a fact rather than a negotiation. If the disagreement is about liquidity rather than strategy, a recapitalization or a buyout of the departing interest may resolve it without selling the asset. Both require a defensible valuation, and bringing in new investors to fund a buyout raises securities questions that need counsel.

Sources and methodology

Federal tax material is quoted from IRS publications and pages read directly, with the revision or last-updated date recorded. Product claims are verified against the DealWorthIt application source code — the plan-capability matrix, the projection field set, the sale and refinance provenance formulas and the write-path gates — rather than against marketing material, and every gated capability is named with its gate.

• Gain, basis, amount realized and selling expenses — IRS Publication 544, Sales and Other Dispositions of Assets (2025).
• Holding period, long-term rates and the 25% maximum on unrecaptured section 1250 gain — IRS Topic no. 409, Capital gains and losses (last updated February 25, 2026).
• The 3.8% net investment income tax and its thresholds — IRS, Net Investment Income Tax (last updated July 1, 2026).
• Section 1031: real-property limitation, the 45-day and 180-day periods, qualified intermediaries, the related-party two-year rule, and that gain is deferred rather than eliminated — IRS Instructions for Form 8824 (revised April 30, 2026).
• Installment sales and the year-of-sale recapture rule — IRS Publication 537, Installment Sales (2025).
• Suspended passive losses on a full disposition — IRS Instructions for Form 8582 (2025).
• Interest-rate benchmarks — SOFR, Federal Reserve Bank of New York and the U.S. Treasury daily par yield curve. Both are cited as publishers to read rather than as numbers to quote.

Methodology for the worked example. The property, the partnership and every figure are invented; nothing is drawn from a real transaction, a customer or any DealWorthIt data set. Every input is printed in the inputs table and every output is computed from those printed figures. Amortizing payments use the standard annuity formula with monthly compounding and balances are run month by month. Sale price is exit NOI divided by exit cap rate; net sale proceeds are sale price less selling costs, less the loan balance at the sale date, less any prepayment penalty. Refinance proceeds are the new loan less the existing balance, less the prepayment penalty, less refinance closing costs, with the new loan sized as the smallest of the loan-to-value, debt-yield and coverage constraints. Annual cash flow is NOI less debt service less capital expenditure. Capital at risk at year 0 is Path A's net proceeds less any cash a refinance releases; IRR is the rate at which those cash flows have zero net present value; equity multiple is total distributions over that capital; cash-on-cash is year-1 cash flow over the same figure. Taxes are excluded, and the article states which way that simplification biases the comparison.

What is observed and what is interpretation. The tax content is published federal material, quoted with its citation. The product capabilities and their plan gates are read from application source. The framing that an exit assumption belongs in the acquisition underwriting, that a refinance is a financing decision rather than an exit, the decision-framework table, the checklist and the reading that no analysis can identify a correct exit are DealWorthIt editorial judgment — one considered view, offered as judgment rather than fact.

What was omitted, and why. No national cap-rate range, transaction-volume figure or interest-rate level appears anywhere in this article. No source with a stated methodology and an unambiguous as-of date was available for them, a broker-marketing range is not a national fact, and a rate printed in an evergreen article is wrong within weeks. Where such a figure would have helped, the article gives you the arithmetic to use your own instead. No third-party platform, brokerage, property manager or law firm is named or recommended anywhere in this article, because no basis for ranking one against another was established. An earlier version of this page profiled several; those profiles have been removed rather than disclosed, because a placement that cannot be shown to be unpaid cannot honestly be described as unpaid.

Disclaimer. This article is general information about published federal tax material and about what the DealWorthIt application does. It is not tax advice, not legal advice, not investment advice, and not a substitute for a CPA, an attorney or a broker who knows your property, your entity, your loan documents and your state's law. Tax outcomes depend on your ownership structure, holding period, prior depreciation, debt, state law and personal circumstances. Every projection here is arithmetic performed on assumptions, not a forecast of what any property will do. Rules change — verify the current text before you rely on any of it.