Situation: I am a 60-year old surgeon and I want to retire at 70. I own surgery center real estate that has doubled in value and that I receive monthly rent for and that I pay ordinary income tax on. I am in the 30% tax bracket. The annual increase in rent is 2.5%. In order to get maximum value for the real estate it will require at least 10-year lease. If I sell now I lose the income from the rent and will have to pay 20% capital gains tax, but if I wait to sell I may not be able to get maximum value as I may not be able to sign 10-year lease or find another surgeon to take over the lease. If I sold now I could invest the money in the stock market and make an average of 10% return per year. What should I do?
Let’s break this down step-by-step, because your decision is really about comparing risk-adjusted after-tax returns between:
Keeping the real estate and collecting rent for 10 years
Selling now, paying capital gains tax, and investing in the stock market
1 Key Facts You Gave Me
Current age: 60 → retirement goal: age 70
Tax bracket: 30% (ordinary income on rent)
Capital gains tax: 20% (if sold now)
Rent increases: 2.5% annually
Maximum value requires a 10-year lease (you may not be able to secure this later)
Stock market return assumption: 10% annually (long-term average)
2️⃣ Step 1: Model “Keep the Real Estate” for 10 years
We’ll assume:
Current annual rent = R (we’ll keep it as a variable first).
Rent taxed at 30%, so after-tax rent each year = R×(1−0.30)R×(1−0.30).
Rent increases 2.5% per year.
At the end of year 10, you sell the property at today’s market value × future price growth assumption. You’ll owe 20% capital gains tax on the gain.
Since you didn’t give me the property’s current value or rent, let’s set some placeholder numbers to illustrate:
Property value today: $5M
Annual rent today: $300,000 (~6% cap rate)
Basis (what you paid): $2.5M (it doubled in value)
💰 10-Year After-Tax Rent
We use a 2.5% growth rate for rent and 30% tax rate:
Year 1 after-tax rent = 300,000×0.70=210,000300,000×0.70=210,000
Over 10 years, with 2.5% growth, total after-tax rent ≈ $2.38M.
🏠 Sale at Year 10
If the property value grows at 2.5% annually:
Future value = 5,000,000×(1.025)10≈6.39M5,000,000×(1.025)10≈6.39M
Capital gain = 6.39M−2.5M6.39M−2.5M = 3.89M
Capital gains tax at 20% = $778k
Net sale proceeds ≈ $5.61M
📊 Total value in hand after 10 years:
Rent: $2.38M
Sale: $5.61M
Total ≈ $7.99M
3️⃣ Step 2: Sell Now and Invest
If you sell today for $5M:
Gain = 5M−2.5M = 2.5M5M−2.5M = 2.5M
Capital gains tax = $500k
Net investable amount = $4.5M
If invested at 10% annually for 10 years:
Future value = 4.5M×(1.10)10≈11.67M4.5M×(1.10)10≈11.67M
4️⃣ Comparing the Two
Option
Future Value at 70
Main Risks
Keep Real Estate
~$7.99M
Lease renewal, surgeon shortage, property value fluctuations, tenant risk
Sell & Invest
~$11.67M
Stock market volatility, possible bear markets
5️⃣ What This Means
Mathematically (given your numbers), selling now and investing wins by a large margin—~$3.7M more in expected value over 10 years.
The reason:
The rental yield after tax + modest property appreciation can’t compete with compounding at 10% per year.
The lease risk (not being able to sign a 10-year lease later) makes the “hold” scenario potentially worse than the numbers above.
From a pure numbers and risk-adjusted return standpoint, selling now appears better.