3 Tax-Saving Strategies for Sellers
How to lower your tax bill—or at least defer it.
If you’re planning to sell an asset, you’ve probably invested in some repairs and improvements to spruce it up a bit, interviewed brokers and started thinking about where you’re going to redeploy the proceeds. But have you planned for the tax bill you might receive?
“Especially with multifamily properties, it’s absolutely critical for owners acquiring and operating the property to consider how it’s structured in order to effectively and efficiently dispose of the property from a tax standpoint,” said Rob Wall, a tax partner at law firm Akerman LLP. “It may cost a little bit of money to consult with someone on planning the structure beforehand, but it will be a lot less expensive than trying to fix it after a sale.”
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Wall recommends planning an exit strategy before you make an investment. Looking ahead this way expands your options for reducing tax liability when you eventually sell the asset.
“Structuring the transaction correctly on the front end is a make-or-break for some tax advantages,” noted Cristy Andrews, a certified public accountant & head of the real estate practice group at Warren Averett.
Here are three proven ways to structure an asset sale to minimize or defer your tax liability.
1. 1031 exchanges
If you’ve never considered a 1031 exchange, or haven’t done one in a while, this might be a good time to add it to your short list of options. Section 1031 of the Internal Revenue Code is popular because it provides beneficial tax treatment for investors who sell a property at a gain in accordance with a qualifying like-kind exchange.
Under the rules, the seller can postpone paying taxes due on the gain as long as the proceeds are rolled over into an interest in a real estate asset that can be considered a like-kind property. Though the sale isn’t tax-free, the exchange allows the seller to defer the taxes on the capital gains.
There’s no limit on how many times you can do a 1031 exchange. Under the code, investors can repeatedly “flip” properties and defer the taxes on each sale. Any type of real estate qualifies, so if you want to exchange an apartment property for a triple-net-lease retail building, that’s fine as long as both properties are located in the U.S. and held for business or investment use. (Note that the property must be a capital asset, not inventory.)
But there are strict rules to qualify for a Section 1031 deferment. Within 45 days of the sale closing date, the seller must identify one or more replacement properties. That replacement property must then be acquired within 180 days of the sale. If you miss those deadlines, you’ll lose the Section 1031’s tax benefits.
Finding a replacement property is often a challenge, but when a suitable asset can’t be found in 45 days for a 1031 exchange, Delaware Statutory Trusts can provide an alternative strategy. These vehicles allow investors to own fractional interests in real estate assets and are considered interests in real estate for tax purposes under Delaware law. In other states, co-tenancies are commonly used with a similar effect.
Mix-and-Match Tactics
Some complicated dispositions call for a combination of strategies. In 2002, Alexandria, Va.-based Bonaventure acquired a multifamily property on behalf of friend and family investors. While the firm didn’t have an equity stake in the property, which was built in the 1960s, it did manage the asset. In 2019, it entered into a 1031 transaction for the disposition of the property and exchanged it for Commons on Potomac Square, a 104-unit community in Sterling, Va.
By 2023, after two decades of depreciation on both properties, the investors’ tax basis had become very low. While they wanted to capitalize on the increased value of Commons on Potomac Square, selling it outright would have triggered significant capital gains taxes, eating up much of their net worth in the property.
Instead, they sold the property through a 721 exchange—an UPREIT transaction—that allowed the investors to exchange their ownership in the property for interests in a diversified multifamily portfolio, with the flexibility to either redeem or remain invested and continue compounding returns. Opting for a 721 exchange rather than another 1031 gave the investors continued tax deferral, plus diversification and liquidity.
Bonaventure’s founder & CEO, Dwight Dunton, noted that he’s “very much focused” on the after-tax returns of his properties. “Why some people still pay taxes is a good question,” he said. “One of the reasons why is simply knowledge, and I think stories like this will help educate people about the tools and options out there to manage their tax liability.”
2. Qualified Opportunity Zones
In some good news for investors, an important strategy for trimming taxes on asset sales has recently been expanded. You can defer capital gains taxes by reinvesting sale proceeds in a Qualified Opportunity Fund, a vehicle formed to invest in a Qualified Opportunity Zone. Previously, gains could be deferred only until Dec. 31, 2026, but the One Big Beautiful Bill Act extends the deferral period and makes the program permanent. And if you reinvest gains for at least 10 years, those gains are exempt from taxes.
3. Installment sales
If you don’t immediately need the equity from a sale, consider financing the deal for the buyer and structuring the transaction as an installment sale. While you can’t avoid taxes on gains this way, the installment-sale method does allow you to recognize the gain over an extended period as you receive payments on the note. That allows you to spread out the gain and your tax liability.
These are just three ways to reduce or defer taxes on asset sales. You may also want to explore such strategies as UPREITs, charitable remainder trusts and gifting the property through your will, which will exempt the property from capital gains taxes if your heirs sell it immediately. (For more on UPREITs, see sidebar, “Mix-and-Match Tactics”)
If you’re planning for a property disposition, here are some key points to consider:
Get advice early from the right experts. A tax lawyer or a CPA who specializes in 1031 exchanges or Opportunity Zones can tell you “how you can set up the transaction in the most efficient way to plan for an exit,” noted Wall.
Make sure the underlying business deal makes sense. “I know others who have done deals just to get tax benefits and have not only lost on the asset they purchased but ended up not deferring much gain,” said Michael Zaransky, managing principal of MZ Capital Partners. “In a situation like that, I’d rather just pay the tax.”
Review your portfolio at least once a year. If you have a large taxable gain from an asset sale, consider offsetting the gain by selling underperforming assets and creating a loss.
Alternatively, purchase a new apartment property in the same tax year as the sale and perform a cost segregation study. When Zaransky purchased The Jax, a 176-unit building in Chicago’s West Loop neighborhood, he did just that, commissioning a cost segregation study to accelerate depreciation losses that he used to offset gains from the sale of another property the same year.
“The ability to use accelerated depreciation methods when you purchase a property is exceedingly valuable,” said Zaransky. “When you buy a new property, you’re able to depreciate a big portion of the purchase price in the first year by doing a cost segregation study, and that yields an extremely large depreciation deduction. So, if you sell another property in the same calendar year, you can offset the gain—and wipe it out permanently.”
