Selling a property after you have built up wealth in real estate can be a double-edged blade. You’re releasing capital to pursue new opportunities. Capital gains tax on the sale of real estate can be a huge drain on your profits. Federally, it could reach 37%. Many states also impose a capital gains tax.
The good news? When selling real estate, there are tax-efficient and legal strategies that can help you manage your tax bill. Here are seven ways to manage taxes when disposing of real estate, whether you want to reinvest in your portfolio, simplify it, or move into a more passive income.
1. 1031 Exchange
It allows you to sell one property and reinvest the proceeds into another property of “like-kind” while deferring taxes on capital gains. This strategy is especially useful for investors who want to upgrade their properties, move to a new market, or consolidate a portfolio without having to pay immediate taxes. To qualify, however, there are strict IRS rules. You must, for example, identify a new property within 45-days and complete the purchase in 180-days.
Here’s a hypothetical case. An investor wants to sell an apartment building originally purchased for $750k but now valued at $2M. The investor exchanges it for a commercial property worth $3M using a 1031 exchange, deferring the capital gains tax of $1.25M.
2. Delaware Statutory Trusts (DST)
Investors may decide that they do not want to manage the real estate, but still have gains embedded for a long time. In this situation, a Delaware Statutory Trust can be used. DSTs are a way for investors to pool their resources to invest in institutional-grade real estate such as multifamily properties, office buildings and medical centers, without having to worry about the operational duties of ownership.
A DST qualifies as a 1031 Exchange Replacement Property, which means you can sell your property and reinvest in a DST. DSTs also provide passive income via rental distributions. This is a great alternative for investors that prefer to invest in real estate without having to be hands-on.
Here is an example. An investor retires and sells his rental property to reinvest in a DST. He gains a steady income, while eliminating the management responsibilities. This allows for an easy transition from active ownership of real estate to a passive approach, reducing the day-to-day stress of property management or oversight.
3. The Qualified Opportunity Zone (QOZ) Fund
Investors are offered a powerful incentive by Qualified Opportunity Zones. They can defer capital gains tax until December 31, 2026 by reinvesting the gains in a QOZ Fund. If the investment is held at least for 10 years, the gains from the QOZ investment could be tax-free.
The law does provide this treatment but it is not automatic. Investors are required to meet strict eligibility requirements, adhere to strict timing requirements and make sure that the investment is compliant with ongoing program rules. Plus, the long-term benefits are subject to the continuation of the QOZ program itself
While QOZs are a powerful planning tool, it is important to fully understand their requirements and not just focus on the headline tax benefits.
The funds aim to stimulate economic development within designated Opportunity Zones and offer significant tax benefits to investors who are willing to hold their assets for a long time.
This is an example. In June 2025, a business owner sells his company and invests the $5M in gains back into a QOZ Fund. Taxes on these gains can be deferred until 31 December, 2026. If they stay invested until June 2035, taxes will not be due on the appreciation. This strategy is especially attractive to investors who want to diversify their investments into development projects and promote tax efficiency.
4. Charitable Remainder Trust (CRT)
If you’re philanthropically inclined, a Charitable Remainder Trust (CRT) allows you to donate real estate or other appreciated assets, avoid capital gains taxes, and receive income for a specified period of time. A CRT allows the donor to transfer property into the trust and then sell it tax-free. Receives income from its investments. The remaining assets are given to a charity upon the death of the donor or the expiration of the trust.
5. Seller financing (installment sales)
Instead of selling your real estate investment in a lump-sum (and the tax bill that comes with it), you can spread out taxable gains across several years and reduce your tax burden. Sellers can avoid a capital gains tax by structuring their sale as a long term agreement.
An example. The seller financed the sale of a $3M rental property over 10 years. This reduces their annual taxable income, while they collect principal and interest from the loan. This method is particularly helpful for those who want to reduce their tax liability while maintaining a steady cashflow for several years.
6. Estate planning and gifting
Strategic gifting is a way to transfer wealth and avoid estate or capital gains taxes if your real estate portfolio forms part of your legacy. You can pass your real estate assets to your heirs in a tax-efficient manner by using tools such as Trusts, Family Limited Partnerships (FLPs) and Grantor Retained Annuity Trusts(GRATs).
Well-planned estate transfers can help reduce taxes and keep assets in the family. According to IRS rules, assets that are passed down at death get a step-up in basis. This means the heirs receive the asset’s market value when it is transferred which can avoid capital gains taxes altogether should the heir decide to sell.
7. Capital gains exemption for primary residence sales
IRS rules allow you to claim a capital gains exemption of up to $500,000 for married couples or $250,000 for singles when selling your primary residence. This exclusion is available to homeowners who lived in their house for at least 2 of the last 5 years prior to the sale.
Here’s a hypothetical example. The homeowner who sold a $1.2M house (bought for $600K), and excluded $500K of capital gains tax, reduced their tax bill almost to zero.
Select the best tax strategy to meet your goals
You can incur significant taxes by selling real estate without planning ahead. The approach you choose depends on what your goals are , whether you’re looking for liquidity, passive income or a tax efficient legacy plan. Knowing the different tax-advantaged plans will help you make better decisions to protect and grow wealth.
If you’re considering a real estate sale, consult with your financial advisor, tax professional, and estate planning attorney to explore the best options to leverage available tax benefits on your taxes when divesting from real estate.
