Does Selling a Rental Raise Your Medicare Premiums?

It can. Medicare Part B and Part D premiums rise for people whose income passes certain thresholds, and the income that counts includes capital gains and depreciation recapture from selling a rental. Because Medicare looks back two years, a taxable sale this year can raise your premiums two years from now. Gain deferred through a properly completed 1031 exchange is not recognized in the year of sale, so it does not count toward that income figure, but any boot you receive generally does.

This catches many retired owners off guard, because the surcharge arrives long after the closing and long after the tax return was filed.

What is IRMAA?

IRMAA stands for Income Related Monthly Adjustment Amount. It is an extra charge added to the standard Medicare Part B premium and to Part D prescription drug coverage for beneficiaries with higher income.

The Social Security Administration decides whether you owe it, using information from the IRS. The income thresholds and surcharge amounts are set each year, and there are separate thresholds for individual and joint filers. Your own figures should come from the current published tables, not from an article.

Which income does Medicare look at?

Medicare uses modified adjusted gross income, which for this purpose is your adjusted gross income plus any tax exempt interest. Both of these show up in it:

• ›Long term capital gain from selling a rental
• ›Depreciation recapture from that sale
• ›Ordinary rental income, net of expenses and depreciation
• ›Taxable boot received in an exchange
• ›Required minimum distributions, pensions and the taxable part of Social Security

A single large sale can push that number far above your usual level for one year.

Why does the increase show up two years later?

Medicare generally uses the tax return from two years before the premium year. Premiums in 2028, for example, would normally be based on your 2026 return.

So an owner who sells a rental in 2026 and recognizes a large gain may see nothing change in 2026 or 2027. The higher premium appears in 2028, often with no obvious link to the sale in their mind.

The good news is that it is generally a one year effect for a one time gain. If your income drops back to its usual level the following year, the surcharge is normally recalculated the year after that.

How do the income tiers work?

IRMAA is charged in tiers. Each tier has an income range and a fixed surcharge. If your income lands even slightly above the start of a tier, the full surcharge for that tier generally applies. There is no gradual phase in.

That is why the size of a recognized gain matters. A modest gain might move someone up one tier. A large one can lift them several tiers, sometimes to the top.

What does a 1031 exchange change?

In a fully deferred 1031 exchange, the gain on the property you sell is not recognized that year. It carries over into the replacement property instead. Because it is not recognized, it is generally not part of your adjusted gross income for that year, and so it does not feed into the Medicare calculation.

Three points are worth keeping in mind:

• ›Boot counts. Cash you take out, debt you do not replace, or exchange funds spent on non qualifying costs can create taxable boot. That boot is recognized and generally included in income.
• ›Deferral is not elimination. The deferred gain is still there. If you later sell the replacement property in a taxable sale, that gain is recognized then, and could affect premiums two years after that sale.
• ›Rental income continues. Income from the replacement property, whether a directly owned building, a net lease property or a DST interest, generally remains part of your income each year.

A worked example, for illustration only

The figures below are illustrative and do not reflect current IRMAA thresholds or any real household.

A retired married couple usually reports about 150,000 dollars of modified adjusted gross income from pensions, Social Security and investments. They sell a rental with 400,000 dollars of total gain, including depreciation recapture.

If they sell outright, their income for the sale year could be around 550,000 dollars. Two years later, that could put them well into the upper IRMAA tiers for both Part B and Part D, for that one year, on top of the income tax on the sale itself.

If they instead complete a 1031 exchange and reinvest fully, the 400,000 dollars is deferred. Their income for the year stays close to the usual 150,000 dollars, and their premiums two years later are generally based on that.

If they complete the exchange but take 60,000 dollars of cash out at closing, that 60,000 dollars is generally taxable boot. Their income for the year would rise to around 210,000 dollars, and whether that crosses a threshold depends on the tables in force that year.

Can you appeal a surcharge caused by a sale?

You can ask Social Security to use a more recent year's income if you have had a qualifying life changing event, using Form SSA 44. The listed events include marriage, divorce, the death of a spouse, stopping or reducing work, loss of a pension, and loss of income producing property due to a disaster or other event beyond your control.

A voluntary sale of investment property is generally not on that list. Choosing to sell a rental and recognizing a gain does not normally qualify for relief, even though the income was one time. Losing a property to fire, condemnation or another event outside your control may be treated differently.

Questions to raise with your CPA

• ›How much of the gain is depreciation recapture, and how much is capital gain?
• ›Would any part of the planned exchange create boot?
• ›Which IRMAA tier would the sale year income likely fall into?
• ›Does timing the sale across tax years change the picture?
• ›How would a later taxable sale of the replacement property affect premiums?

1031Property is not a tax adviser, and this article is general education only. Medicare thresholds and rules change, and your own situation depends on your full tax picture. If you are considering DST interests as replacement property, note that they are securities for accredited investors only, offered through a licensed broker dealer and definitive offering documents, with risk including loss of principal.

The short version

A taxable rental sale can raise Medicare premiums two years later, sometimes sharply. A completed 1031 exchange generally keeps deferred gain out of that year's income, while boot does not. If you are on Medicare or close to it, include premiums in the conversation with your CPA and Qualified Intermediary before you set a closing date.