Real estate investors often build significant wealth through property sales—but that success usually comes with a capital gains tax bill. While a 1031 Exchange is a well-known method for deferring those taxes, it’s not the only option.
For investors seeking greater flexibility—whether in terms of investment type, asset class, or timing—there are several recognized strategies available that offer potential deferral of capital gains taxes.
At Realized, our mission is to help investment property owners manage their real estate like they manage other parts of their portfolios—strategically and tax-efficiently. Below are some of the most recognized alternatives to the 1031 Exchange.
-
Opportunity Zones (Qualified Opportunity Funds)
Qualified Opportunity Funds (QOFs) offer an alternative to the 1031 Exchange.
Created under the 2017 Tax Cuts and Jobs Act, this program was designed to encourage investment in underserved communities known as Opportunity Zones. When eligible capital gains are reinvested into a QOF, investors may qualify for certain federal tax benefits, subject to timing and holding requirements.
Key elements of the program include:
- Taxes on the original gain can be deferred until December 31, 2026, if reinvested within the required timeframe.
- Investors who hold their Opportunity Zone investment for at least 10 years can eliminate capital gains tax on the appreciation of that investment.
This strategy also offers a longer reinvestment window (typically 180 days or more, depending on the election) and allows investors to diversify beyond traditional real estate assets. This strategy is subject to complex rules and deadlines, and some benefits—such as the original basis step-up—have expired. Investors should consult with tax and legal advisors before pursuing a QOF investment.
-
Installment Sale (Seller Financing)
An installment sale, also known as seller financing, may allow investors to spread the gain over several years by receiving payments in installments, rather than a lump sum.
Benefits include:
- Payments include both principal and interest, which may provide the seller a consistent income stream.
- Spreading out the gain over time may help manage annual taxable income, depending on the seller’s overall tax profile.
This approach does involve some risk, such as potential buyer default or missed payments, so proper planning and structuring are essential.
-
Delaware Statutory Trust (DST) via a Structured Exit
While DSTs are often used in 1031 Exchanges, investors can explore structured exit strategies that combine DSTs with installment sales or other taxable sales for future planning.
Realized supports clients with personalized DST portfolio strategies tailored to their risk tolerance, financial needs, and long-term goals.
-
Charitable Remainder Trusts (CRT)
A Charitable Remainder Trust is an option— for investors with philanthropic goals.
By donating appreciated property to a CRT, investors can:
- Defer capital gains tax on the sale of the property.
- Receive a partial charitable income tax deduction.
- Create a lifetime income stream for themselves or other beneficiaries.
After the trust term ends, the remaining assets go to a designated charity, supporting both personal legacy goals and tax efficiency.
CRTs are irrevocable and involve complex legal and tax structuring. The value of the charitable deduction depends on IRS actuarial assumptions, and income payments are subject to annual tax reporting based on a tiered distribution system.
Evaluating Tax Deferral Options
Each of these alternatives has its own potential benefits, limitations, and eligibility considerations. That’s why it’s important to evaluate all your options before selling an investment property—especially if a 1031 Exchange doesn’t fit your needs.
Realized works with property owners and their advisors to explore real estate strategies that can support long-term financial planning and investment objectives.
Ready to explore your options?
Contact Realized today to review tax-deferral strategies and see how different approaches may support your overall real estate planning efforts.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
