Capital gains tax applies whenever you sell an appreciated asset—whether it’s real estate, stocks, a business, or other investments. For many people, these assets represent a major portion of their net worth, so the tax impact can be significant. For high-income investors, the stakes are even higher because large sales may trigger the highest capital gains brackets, Net Investment Income Tax (NIIT), and other add-on taxes.
Understanding how capital gains tax works—and the strategies available to manage it—can make a meaningful difference in what you keep versus what you owe.
Below are four widely used methods for deferring or reducing capital gains tax, plus an emerging fifth option that has become more attractive with the return of 100% bonus depreciation.
Capital gains tax is calculated on the profit between your purchase price (basis) and your sale price. The IRS separates capital gains into two categories:
Your income level, filing status, and type of asset all influence your final tax rate.
With proper planning, you can often defer or significantly reduce how much tax you owe on appreciated assets.
A 1031 exchange allows real estate investors to defer capital gains taxes by selling an investment property and reinvesting the proceeds into another like-kind property. When done correctly, the tax is rolled forward into the new property rather than paid at the time of sale.
Key rules include:
A 1031 exchange allows investors to stay fully invested in real estate, increase cash flow, upgrade property type, and compound wealth tax-deferred over time.
A 721 UPREIT exchange allows investors to contribute real estate (often starting with a 1031 exchange into a DST) into the operating partnership of a REIT in exchange for OP units. This converts real estate ownership into a more diversified, passive structure—while still deferring capital gains at the time of contribution.
Key benefits include:
A 721 UPREIT can be a powerful option for long-time property owners seeking liquidity, diversification, professional management, or a gradual exit from the landlord role.
Opportunity Zones (OZs) were created to encourage investment in economically distressed communities, offering strong tax incentives for investors who reinvest eligible capital gains into a Qualified Opportunity Fund (QOF).
Benefits include:
For investors who want to reduce taxes and make an impact in underdeveloped areas, Opportunity Zones offer both financial and social benefits.
An installment sale allows sellers to receive payments—and recognize taxable gain—over time rather than all at once in the year of sale. This approach spreads out capital gains, potentially keeping the seller in a lower tax bracket each year.
Benefits include:
However, installment sales must be structured properly to remain compliant with IRS rules, and large transactions may trigger the IRC 453A interest charge, which applies when installment obligations exceed $5 million at year-end.
With 100% bonus depreciation returning in 2025, certain private funds can offer significant first-year depreciation deductions.
With the OBBBA reinstating 100% bonus depreciation in 2025, Bonus Depreciation Funds have become an increasingly attractive tool for reducing taxable income.
These funds invest in assets that qualify for bonus depreciation—such as equipment, certain real estate improvements, or operating business assets—and then pass those depreciation deductions through to investors.
Key benefits include:
This option can be attractive for high-income investors facing large, one-time gains.
No single strategy works for everyone. Some investors use a 1031 exchange to defer taxes indefinitely. Others shift into a 721 UPREIT for long-term passive income. Still others pair Opportunity Zones, Installment Sales, or Bonus Depreciation Funds with a liquidity event to strategically reduce exposure.
Your tax bracket, liquidity needs, estate goals, and overall financial plan determine which combination is most effective.
At Wealthstone Group, we help investors evaluate these strategies side-by-side so they can understand how each one affects taxes, cash flow, and long-term planning. If you're exploring ways to defer or reduce capital gains tax and want clarity on which strategies fit your situation, we’re here to help you make an informed and confident decision.
To learn more about leveraging a 1031 exchange for tax deferral, download our free e-book today!
General Disclosure
Please note that this information is for informational purposes only and does not constitute individual investment advice. It should not be relied upon as tax or legal advice. Consult the appropriate professional regarding your individual circumstances.
Diversification does not guarantee profit or protect against loss in a declining market. It is a method used to help manage investment risk.
Investing in DST properties and real estate securities involves material risks such as liquidity, tenant vacancies, market conditions, competition, interest rate risks, and the risk of losing the entire investment principal. DST 1031 properties are available only to accredited investors and accredited entities. Verify your accredited investor status with your CPA and attorney.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.