How Investors Defer Capital Gains Taxes After Selling Real Estate

Investors who want to defer capital gains taxes after selling real estate typically perform a 1031 exchange allowing them to keep their capital working for them.

If you’ve owned real estate for a long time, you’ve probably said this out loud:

“I don’t want to pay capital gains tax.”

You’re not being greedy. You’re being rational.

You took the risk. You did the work. You dealt with tenants, repairs, vacancies, and the ups and downs of ownership. And now that your property has appreciated, the government wants a large slice of the profit.

It’s frustrating. And it’s why so many investors look for ways to delay or reduce the tax hit.

The good news is: you have options.
The bad news is: there is no magic trick that makes taxes disappear without trade-offs.

This post explains what creates the tax bill, the main strategies investors use, and how to think about which one fits your situation.

What Creates the Capital Gains Tax Bill?

Most of the tax bill on a real estate sale comes from three buckets:

1. Capital gains tax on the appreciation
2. Depreciation recapture tax (often the part investors forget)
3. State income tax, depending on where the property is located

If you bought a property for $300,000 and sell it for $1,000,000, you don’t just pay tax on $700,000 of gain. You may also pay a separate tax on the depreciation you’ve taken over the years. That’s why the total bill can be much bigger than people expect.

The Main Options Investors Use to Defer or Reduce Taxes

Most investors end up choosing one of these five paths:

1. Do a 1031 exchange into another investment property
2. Use a DST as a passive replacement property inside a 1031 exchange
3. Consider a DST to 721 UPREIT path for long-term passive ownership
4. Hold long term as part of an estate plan (step-up in basis)
5. Sell and pay the tax when liquidity and flexibility are the priority

Let’s walk through each.

Option 1: Do a 1031 Exchange

If you want to sell real estate and not pay capital gains tax right now, the most common strategy is the 1031 exchange. A 1031 exchange allows you to sell an investment property and reinvest into another investment property while deferring capital gains taxes.

Key benefits:

• defers capital gains tax
• defers depreciation recapture
• keeps more of your equity working for you
• can be repeated multiple times

This is why many investors say, “I’m never selling. I’m exchanging.”

The Trade-Offs of a 1031 Exchange
A 1031 exchange works well, but it comes with pressure and complexity:

• you need a qualified intermediary
• you have strict deadlines (45 days and 180 days)
• you have to identify replacement properties quickly
• you can’t touch the money
• you have to replace value and debt properly

And if you’re tired of being a landlord, buying another property may not feel like a win. That’s why passive replacement options have grown so much.

Option 2: Use a DST as a Passive Replacement Property

A Delaware Statutory Trust (DST) is one of the most common ways investors complete a 1031 exchange without becoming a landlord again.

With a DST, you can:

• defer taxes through the 1031 exchange
• invest into institutional-quality properties
• diversify across multiple assets
• receive passive income
• avoid active property management

DSTs are especially popular with retiring landlords who want to stop taking calls about roofs, tenants, and repairs.

Option 3: Use a DST to 721 UPREIT Strategy

A DST is still a real estate investment that will eventually sell. When it sells, you either exchange again or pay taxes. Some investors don’t want to repeat that cycle. In certain programs, investors may have the option to convert from a DST into a 721 UPREIT structure without triggering tax at the time of conversion.

Why investors like this idea:

• long-term passive ownership
• continued tax deferral
• often a path to limited liquidity later, depending on the REIT
• can simplify estate planning
• may reduce the need for repeated 1031 exchanges

It’s not for everyone, but for the right investor it can be a strong “end game” strategy.

Option 4: Hold Until Death (Step-Up in Basis for Heirs)

This is one of the most powerful tax strategies in real estate, and it’s legal. If you hold property until you die, your heirs may receive a step-up in basis, meaning the tax basis resets to the market value at the time of death.

If done correctly, that can eliminate:

• the capital gains tax
• depreciation recapture tax

This is why you hear the phrase “swap until you drop.”

But this only works if:

• you don’t need liquidity
• your assets are structured properly
• your estate plan is clean
• and the step-up applies based on how you own the property

This is also where certain trusts and older corporations can create issues, so it needs to be reviewed carefully with a CPA and estate attorney.

Option 5: Sell and Pay the Tax (And Move On)

This is the option no one wants to talk about, but sometimes it’s the best one.

There are situations where paying the tax is reasonable:

• you want full liquidity
• you want to diversify into stocks or businesses
• you want to reinvest outside of real estate
• you don’t want long-term illiquidity
• you want control and flexibility

A lot of investors assume paying tax is always a mistake. That’s not true. The real question is: what will you do with the money after taxes? If your after-tax plan is strong, selling can be a rational choice.

Most Strategies Are About Deferral, Not Elimination

Most tax strategies are about deferral, not permanent avoidance. You don’t want to defer taxes just to end up in a worse investment or a structure that doesn’t fit your life.

The goal is not “pay the least tax at all costs.” The goal is: make a smart decision that fits your priorities.

Helping Investors Choose the Path That Fits

When someone says, “I don’t want to pay capital gains tax,” we usually come back to three questions:

1. Do you still want to own real estate?
2. Do you want to be active or passive?
3. Is your priority income, growth, liquidity, or legacy?

Once those are answered, the best path usually becomes clear.

For some people it’s a traditional 1031 into a direct property.
For others it’s a diversified DST portfolio.
For others it’s a DST to 721 strategy.
And for some, it’s simply selling and moving on.

From Sale to Strength: Turning Tax Deferral Into a Real Plan

If you want to defer capital gains taxes, you have options. But every option comes with trade-offs. The best strategy is not the one that avoids the most tax. It’s the one that fits your life, your risk tolerance, and your long-term plan.

At Corcapa 1031 Advisors, we help investors evaluate replacement strategies, compare risks, and build clear plans for passive, tax-deferred real estate ownership.

If you want to talk through your situation and see what actually makes sense, schedule an appointment or call (949) 722-1031

About Corcapa 1031 Advisors and 1031 DST Solution

Founded in 2011, Corcapa 1031 Advisors and 1031 DST Solution is a financial advisory firm specializing in 1031 and 1033 exchanges and tax mitigation strategies. The firm works with Delaware Statutory Trusts, Tenant-in-Common programs, sole-ownership transactions, and 721 UPREIT structures. Corcapa has advised hundreds of clients across thousands of investments, facilitating more than $1 billion in completed exchanges. The firm works with registered investment advisors and financial advisors nationwide on tax-deferred exchange strategies.

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. This is not an offer to buy or sell or a solicitation of an offer to buy or sell any interest. DST investments are speculative, illiquid, and may carry a high degree of risk – including the potential loss of the entire investment. Performance is not guaranteed and could be lower than anticipated. Past events and trends do not predict or guarantee or indicate future events or results.

Securities offered through DAI Securities, LLC, Member FINRA/SiPC.