Can a charitable remainder trust replace a 1031 exchange?

The two tools answer different questions about who ends up owning the building

A 1031 exchange keeps the asset in your name and moves the basis across; a charitable remainder trust gives the asset away and buys you an income stream in return. Both avoid a tax bill on the sale, which is why they get compared, but only one of them still belongs to your family afterwards.

That makes philanthropic intent the gate, not a nice-to-have. If the phrase "at least 10 percent of the initial net fair market value" going to charity is unwelcome, the CRT is the wrong instrument and the comparison should be between exchanging and paying the tax, laid out on DST versus paying the capital gains tax.

The shape of the choice, including 1033, §121 and opportunity zones, is mapped on the real estate tax deferral map.

The trust sells without tax because §664(c)(1) exempts it, not because the gain vanishes

§664(c) provides that a charitable remainder annuity trust and a charitable remainder unitrust "shall, for any taxable year, not be subject to any tax imposed by this subtitle," subject to the unrelated business income exception. The trust therefore reinvests the full sale price rather than the after-tax price.

The sequence matters more than the paperwork. The property has to be contributed before you are contractually bound to a buyer; contribute after the deal is locked and the IRS can treat the gain as yours under the assignment-of-income doctrine, leaving you with tax and no asset.

Hypothetical. A $2,000,000 building with a $300,000 basis is contributed and sold by the trust; $2,000,000 goes to work inside the trust, against roughly $1,700,000 of gain that would otherwise have been taxed at 25% on the depreciation slice, 15% or 20% on the rest, and 3.8% on top.

What comes back to you, and the order it is taxed in

Both forms are described by the IRS the same way on the payout: "at least 5% and no more than 50%" a year. A CRAT "pays a specific dollar amount each year" fixed at the start; a CRUT "pays a percentage of the value of the trust each year," so the cheque moves with the portfolio.

The character of that cheque is not your choice. §664(b) works through four tiers in order, ordinary income first, then capital gain, then other income including tax-exempt amounts, then corpus, which means the deferred gain from the building comes out as capital gain over the years rather than disappearing.

A net income unitrust with makeup under §664(d)(3) pays the lesser of the stated percentage and the trust's actual income, with a makeup account for the shortfall, which is how some retirees push income into later, lower-bracket years.

• The term is one or more lives, or a fixed term of years not exceeding twenty.
• The remainder interest, valued under §7520, must be at least 10% of the initial net fair market value.
• The §7520 rate resets monthly: 5.60% for October 2026 and 5.20% for August 2026, per Rev. Rul. 2026-19 and 2026-13.
• Your income tax deduction now is the present value of that remainder, not the value of the building.

A mortgage on the building is the usual reason this does not work

§514(c)(2)(A) provides that where property is acquired subject to a mortgage or lien, "the amount of the indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the organization incurred in acquiring such property," whether or not the trust assumes it.

That turns the building into debt-financed property under §514(b)(1), and the resulting unrelated business taxable income meets §664(c)(2), which imposes "an excise tax equal to the amount of such unrelated business taxable income" for that year. A leveraged building can therefore cost the trust its whole exemption for the year of sale.

A 1031 exchange has the opposite relationship with debt: it needs the mortgage replaced, with new debt or with cash, which is the subject of replacing your mortgage. A leveraged owner who wants out of management is usually looking at a DST rather than a trust.

What your heirs get in each case, and what that is worth

Under the CRT, the remainder goes to charity and your family receives only the income that was paid out during the term. Under the exchange route, the replacement property or DST interest stays in the estate and passes to heirs at its date-of-death value, which is the whole point of using DSTs in estate planning.

The offsetting benefit is the deduction and the removal of the asset from a taxable estate, which matters to a small number of owners and not to most. Whether to hold for the step-up at all is argued through on step-up versus exchanging now.

Charitable deduction limits bite here too: appreciated property given to a public charity is generally limited to 30% of adjusted gross income under the capital gain property rules in Publication 526, with a carryover for the unused part, so a $2,000,000 building rarely produces a $2,000,000 deduction in one year.

Using both: one property to a trust, the rest through the exchange

Nothing forces a single answer across a portfolio. Owners with several buildings sometimes put the one with the deepest gain and the strongest charitable pull into a trust and exchange the others, and the split is decided property by property rather than in one motion.

One practical detail for California sellers: Form 593 lists a charitable remainder trust among the sellers fully exempt from real estate withholding on Part III line 9, which is a different route to the same closing-table outcome as the exchange box on line 10, covered on state withholding at closing.

A CRT is a permanent, irrevocable structure with trustee, valuation and filing costs every year, so have your CPA or attorney model it against the exchange with your actual basis, age and income before anything is signed. Breakwater Exchange is a 1031 exchange broker and does not create or administer charitable trusts; we can size the exchange side of the decision through the form on this site.