Real estate is unusually rich in legal ways to avoid capital gains tax, which is why sophisticated investors so rarely just sell and pay. Some of these strategies defer the tax indefinitely; one can eliminate it on future growth; another erases it entirely at death. They suit different situations, gains, and goals, and the art is matching the tool to the circumstance. This memo surveys seven of the most important, with a clear-eyed note on what each does and doesn't accomplish. It's an overview, not tax advice — each strategy is detailed enough to warrant its own analysis with your CPA.
- Several legal strategies defer capital gains tax indefinitely; one can eliminate tax on future appreciation; one erases it at death.
- The 1031 exchange (and its passive cousin, the DST) is the workhorse for deferring real-estate gain.
- Opportunity Zone funds work for any capital gain and can eliminate tax on new growth after ten years.
- Installment sales, charitable remainder trusts, and the step-up at death round out the toolkit — each for a different goal.
Defer, reduce, or eliminate
It helps to sort these tools by what they actually do. Most defer the tax — they postpone it, sometimes indefinitely. A couple can reduce or eliminate it outright. None of them is a loophole; all are deliberate provisions in the tax code. As you read, keep your own goal in mind — keep investing in real estate, exit to something passive, diversify, generate income, or pass wealth to heirs — because that goal, more than the tax itself, should drive the choice. (For how the underlying tax is built, start with how capital gains tax on real estate works.)
1. The 1031 exchange
The cornerstone strategy. A 1031 exchange lets you sell investment real estate and defer the entire tax — capital gains, depreciation recapture, and the NIIT — by reinvesting the proceeds into like-kind replacement property. You can repeat it indefinitely, rolling from property to property, and the gain rides along in your carried-over basis. It's the workhorse of real estate tax deferral, suited to anyone who wants to stay invested in real estate. Its constraints are the strict 45- and 180-day deadlines and the requirement to reinvest fully into like-kind property.
2. Delaware Statutory Trust (passive 1031)
A Delaware Statutory Trust is a way to complete a 1031 exchange passively. Recognized by the IRS as eligible replacement property, a DST lets you defer the same taxes while owning a fractional, professionally managed interest in institutional real estate — no landlording. It's the natural choice for an investor who wants to defer tax but is done managing property, and it can absorb the exact leftover equity a direct purchase can't. The trade-offs are illiquidity and loss of control.
3. Opportunity Zone fund
An Opportunity Zone fund is the one tool here that accepts any capital gain — real estate, stock, a business sale — not just real estate. You defer the original gain and, critically, can eliminate tax on the fund's own appreciation if you hold for at least ten years. It suits an investor with a large gain of any kind, a decade-long horizon, and tolerance for development-style risk. Note the program was made permanent and revised by the 2025 tax law, so confirm current rules.
4. 721 exchange (UPREIT)
A 721 exchange contributes property into a REIT's operating partnership for OP units, deferring tax while moving you into a diversified, semi-liquid REIT. It's typically reached via the two-step path — 1031 into a DST, then 721 into the REIT — and it suits an investor ready to exit active real estate permanently for diversification and an estate-friendly asset. The catch: it's a one-way door that ends future 1031s on that equity.
5. Installment sale
An installment sale (under Section 453) spreads your gain — and the tax — across the years you receive payments, rather than recognizing it all in the year of sale. By taking the proceeds over time, you may keep more of the gain in lower brackets and defer part of the tax. It suits a seller willing to act as the lender and accept the buyer's credit risk, and it pairs poorly with depreciation recapture (which is generally taxed up front). It's a simpler, more limited tool than the exchanges above, but useful in the right deal.
6. Charitable remainder trust
A charitable remainder trust (CRT) lets you contribute appreciated property to a trust, which can sell it without immediate capital gains tax, pay you an income stream for life or a term of years, and leave the remainder to charity. You get an income-tax deduction, an income stream, and avoidance of the immediate gain, in exchange for ultimately giving the remainder to charity. It suits charitably inclined investors who want income and tax efficiency, and it's irrevocable — a significant commitment that calls for careful planning with counsel.
7. Hold and step up at death
The simplest and most complete elimination of all: don't sell. If you hold appreciated real estate (or DST/OP-unit interests) until death, your heirs generally receive a stepped-up basis equal to fair market value, which can eliminate the deferred capital gain and recapture entirely. Combined with serial 1031 exchanges during life — "swap till you drop" — this is how decades of deferred gain can ultimately go untaxed for the next generation. It suits investors focused on legacy who don't need to liquidate, and it's the quiet endgame behind much long-term real estate tax planning.
Choosing among them
Match the tool to your goal. Want to keep owning real estate? A 1031. Done managing but want to defer? A DST. A non-real-estate gain, or willing to commit a decade for tax-free growth? An Opportunity Zone fund. Ready to consolidate into a REIT for good? A 721. Want to spread the tax over time? An installment sale. Charitably inclined and want income? A CRT. Focused on legacy and able to hold? Step-up at death. Several can even combine. The one universal rule is that these are complex, fact-specific strategies with real trade-offs — choose with a CPA and attorney, not from a list alone.
Frequently Asked Questions
What's the best way to avoid capital gains tax on investment property?
There's no single best way — it depends on your goal. A 1031 exchange or DST is the workhorse for deferring real-estate gain; an Opportunity Zone fund can eliminate tax on future growth; holding until death can erase the gain entirely for heirs.
Can I avoid capital gains tax entirely, not just defer it?
Sometimes. An Opportunity Zone fund can eliminate tax on the fund's appreciation after ten years, and holding until death gives heirs a stepped-up basis that can erase the deferred gain. Most other strategies defer rather than eliminate.
Do these strategies work for a non-real-estate gain?
Mostly only the Opportunity Zone fund, charitable remainder trust, and installment sale apply broadly. The 1031 exchange, DST, and 721 are for real estate (or interests in it); an OZ fund accepts any capital gain.
Is a DST different from a 1031 exchange?
A DST is a way to do a 1031 exchange passively — it's IRS-recognized replacement property, so you defer the same taxes while owning a managed fractional interest instead of buying and running a property yourself.
Can I combine these strategies?
Yes. For example, 1031 into a DST and later 721 into a REIT, or use a 1031 for real-estate proceeds while placing a separate stock gain in an Opportunity Zone fund. Combinations should be designed with your advisors.
Glossary
- 1031 Exchange
- A like-kind exchange of investment real estate that defers capital gains tax and can be repeated.
- Opportunity Zone Fund
- A fund accepting any capital gain that defers tax and can eliminate tax on appreciation after ten years.
- Installment Sale
- A sale that spreads gain and tax across the years payments are received.
- Charitable Remainder Trust (CRT)
- An irrevocable trust that sells appreciated property tax-deferred, pays the donor income, and leaves the remainder to charity.
- Step-Up in Basis
- The reset of an asset's basis to fair market value at death, which can eliminate deferred gain for heirs.
Disclosures
This memo is published by Baker 1031 for general informational and educational purposes only. It is not investment, legal, or tax advice, and is not an offer to sell or a solicitation to buy any security. Tax rules, rates, and thresholds are complex, depend on your individual circumstances, and change over time; consult your own CPA and attorney before acting.
Every figure and example here is general and illustrative, not a projection or a representation about any specific transaction. Securities offered through Aurora Securities, Inc., member FINRA / SIPC; Baker 1031 Investments is independent of Aurora Securities, Inc. Private placements referenced are sold only to verified accredited investors and involve substantial risk including loss of principal.
