Choosing an Income Fund

Selling Your Rentals but Keeping the Income

By Sierra Davis, Principal & Fund Manager, Essential Income Fund IPublished October 11, 2026Last reviewed October 11, 2026

Short answer

Landlords who sell rentals but still want income generally choose between a 1031 exchange into other real property, which may defer tax, and a taxable sale followed by reinvesting the proceeds in income investments such as seller-financed notes, real estate debt funds, Treasuries or CDs. Tax treatment depends on the details, so a CPA should be involved before the sale. Essential Income Fund I is one example of where proceeds could go, a private real estate debt fund for verified accredited investors that pays a fixed contractual rate monthly.

It's the 2 a.m. water heater. The tenant who stopped paying in November. The turnover that ate three months of rent. The property manager who costs a lot and still calls you about everything.

You don't hate real estate. You're just done being a landlord. But the rent checks are a real part of your income, and you don't want to give that up.

Here's the shift I'd suggest. You can stay in real estate as the lender instead of the landlord. You are their bank, not their landlord. Below is how a sale generally works on the tax side, the main options for replacing rent with interest, and where our fund fits.

Taxes on the sale, in general terms

This is where a CPA earns their fee, and you want them involved before you list the property, not after it closes. In general terms, selling a rental can trigger several layers of tax.

Capital gains: the difference between your sale price and your adjusted basis is generally taxed as a capital gain.
Depreciation recapture: depreciation you took, or could have taken, over the years is generally taxed separately and often at a different rate.
State taxes: many states tax the gain as well.
Net investment income tax: some higher-income investors may owe an additional federal tax on the gain.

1031 exchange or taxable sale

A 1031 exchange may let you defer those taxes by reinvesting in like-kind real property within strict deadlines, using a qualified intermediary. The catch for a tired landlord is that the replacement generally has to be real property. Many people exchange into another rental and keep the headaches, or into a passive ownership structure such as a Delaware statutory trust.

A mortgage note or an interest in a debt fund is generally not like-kind real property, so it usually can't be the replacement in a 1031 exchange. If you want to become the lender, you're usually looking at a taxable sale and reinvesting what's left. Some sellers also use an installment sale through seller financing, which may spread the gain over the years payments are received. Your CPA and a real estate attorney should confirm what applies to you.

Options for replacing rent with interest

General characteristics. Individual investments vary, so read each offering's documents and get tax advice before you sell.
Option	Income	Your work	Main trade-offs
1031 into another rental	Rent, after expenses	Still a landlord	Tax deferral, same headaches
1031 into a Delaware statutory trust	Distributions set by the sponsor	Passive	Illiquid, sponsor-dependent, distributions can change
Seller-finance your own sale	Borrower's payments, often monthly	You're the lender; a servicer can help	One borrower, one property; you handle any default
Buy mortgage notes directly	Borrower payments	Underwriting and paperwork	Concentration in a few loans
Real estate debt fund	Interest, often fixed and monthly	Passive	Illiquid for the term; borrower default risk
Treasuries and CDs	Fixed interest	Passive	Liquid or short term, but rates reset at maturity

Questions to ask before you sell

What will I actually net after taxes, closing costs and paying off the mortgage?
Does a 1031 exchange, an installment sale or a straight sale make the most sense for my numbers? (Ask your CPA.)
How much monthly income do I need to replace?
When might I need the principal back?
Am I comfortable being in a lender position, and how is the collateral protected?
How much of the proceeds should stay liquid?

From my desk · Rent versus interest

Picture a landlord with three single-family rentals that bring in $5,400 a month in gross rent. After taxes, insurance, repairs, vacancy and management, she keeps about $2,100 a month.

Suppose that after the mortgage payoffs, closing costs and taxes, she has $300,000 to reinvest. She keeps $50,000 liquid and puts $250,000 in a 36-month certificate. With the 1% bump for $100,000 or more, the rate is 9.75%. That's $24,375 a year, or about $2,031.25 a month, with no tenants, no repairs and no 2 a.m. calls.

It isn't a perfect swap. The rentals could appreciate and the certificate won't. The rent can rise, and the certificate rate is fixed for the term. The certificate is also illiquid until maturity. But for someone who wants income more than upside, it's worth running the numbers.

Hypothetical example for illustration; not a real transaction or a prediction of results. Not tax advice. Consult a CPA before selling.

Where Essential Income Fund I fits

	Essential Income Fund I
What you own	A certificate in a fund that lends against real estate
Income	Fixed contractual rate of 8% to 10.5% a year, paid monthly on the 15th
Terms	24, 36, or 60 months
Minimum	$20,000
Collateral	Primarily first lien; 60.4% weighted average LTV as of September 1, 2026
Fund-level borrowing	None. The fund does not borrow
Fees to investors	No management, performance or acquisition fees
Tax reporting	Form 1099-INT

Best for accredited former landlords who want to stay in real estate as a lender, collect monthly contractual interest and leave the money in place for the full term. Not for sale proceeds you plan to roll into a 1031 exchange, investors who want appreciation, money you may need before maturity, or anyone who isn't a verified accredited investor.

Interest is generally taxed as ordinary income in a taxable account, and there's no depreciation to offset it the way there was with your rentals. Factor that into the comparison with your CPA. For more on the trade-offs, see mortgage notes vs. rental property.

Frequently asked questions

Can I do a 1031 exchange into a real estate debt fund?

Generally no. A 1031 exchange requires like-kind real property, and a mortgage note or an interest in a debt fund is generally not treated as real property for that purpose. Confirm with a CPA or qualified intermediary before you sell.

How can I replace rental income after selling my properties?

Common options include exchanging into passive real property, seller-financing the sale, buying mortgage notes, investing in a real estate debt fund, or holding Treasuries and CDs. Each has different income, liquidity and tax trade-offs.

What taxes do I pay when I sell a rental property?

Selling a rental generally triggers capital gains tax on the gain and depreciation recapture on depreciation taken, and possibly state tax and the net investment income tax. The amounts depend on your basis, holding period and income, so work with a CPA.

Is seller financing a way to keep income from a rental sale?

Yes, seller financing lets you become the lender and receive monthly payments from the buyer, and it may allow installment sale treatment. It also concentrates your income in one borrower and one property, so underwriting and documentation matter.

This article is for educational purposes only and is not investment, legal, or tax advice. It describes general characteristics of real estate debt investments; individual investments differ, and all involve risk, including the possible loss of principal. Essential Investment Group, LLC is not a registered investment advisor, broker-dealer, or bank. Any offer of securities in Essential Income Fund I, LLC is made only through its Private Placement Memorandum to verified accredited investors under Rule 506(c) of Regulation D.