How to Defer Capital Gains on a Property Sale, and Why the 1031 Is Only One Route

How to avoid capital gains tax on real estate

For most sellers the accurate word is defer rather than avoid. A like-kind exchange defers gain into a replacement property, several trust and fund structures defer it without buying more real estate, and the primary residence exclusion can genuinely eliminate a limited amount. Which one applies depends on what you are selling and what you want afterward.

Start with what you are actually trying to do

Three different outcomes get filed under the same search, and picking the wrong one is how people end up with an instrument that does not fit.

Deferring means the gain is not taxed now. It follows you, usually as a lower basis in whatever you acquire, and it is the right goal if you intend to stay invested.

Eliminating means the gain is not taxed at all. Very few routes do this, and the main one is limited.

Reducing means the taxable gain itself is smaller, through basis, timing or the character of the income. This is the least discussed and it is often where the money actually is.

Most sellers want the first. Most articles answer the third. That mismatch is why this subject feels confusing.

The exclusion that applies to a home, not an investment

If the property is your primary residence, this is the first thing to check and it is not deferral, it is exclusion.

The IRS sets out the rule in Topic 701. You may qualify to exclude up to $250,000 of gain from the sale of your main home, or up to $500,000 filing jointly with a spouse. Qualifying turns on an ownership test and a use test, which generally means owning the home and living in it as a residence for at least 24 months out of the five years ending on the date of sale, and you are generally not eligible if you excluded gain on another home in the two years before this sale.

It applies to a residence rather than to an investment property, and the interaction between the two is where things get interesting for anyone who has converted a rental into a home or the other way round. That is a case worth taking advice on rather than reading about.

Deferral through a like-kind exchange

This is the one everybody has heard of and it deserves its reputation. Sell investment real property, buy investment real property, defer the gain. Our page on the 1031 exchange sets out the mechanics and the clocks.

What is less well known is how many shapes it comes in. A delayed exchange is the standard version where you sell first. A reverse exchange is for when the replacement property has to be bought before the old one sells. An improvement exchange lets exchange funds pay for construction on the replacement property. A blended exchange combines an exchange with another strategy where a straight swap will not reach the whole gain. Each of those is a separate page on this site because each is a genuinely different transaction rather than a variation in wording.

The limitation is the important part. A 1031 exchange keeps you in real estate. If what you want is out of real estate, it is the wrong tool and no amount of structuring changes that.

Deferral without buying more real estate

This is the half of the menu that gets least attention, and for sellers who want to stop being landlords it is where the answers live.

A Delaware Statutory Trust interest can qualify as replacement property in an exchange while being a passive holding rather than a building you manage. It is also the reason DSTs get used as a backstop when an identification window is closing, because they can often close quickly.

A Deferred Sales Trust works on a different principle, spreading recognition of the gain over the period during which payments are actually received rather than tying it to another property purchase. It answers the question a 1031 cannot, which is what to do when you want the proceeds rather than more real estate.

An Opportunity Zone fund defers gain by reinvesting it into a designated area, on a timetable and under rules that are set by statute and have been revised more than once. Anything you read about Opportunity Zones that is more than a year or two old is worth re-checking before you rely on it.

A conservation easement is a different instrument again and applies to a narrow set of properties and intentions. It is on the menu because it genuinely fits some sellers, not because it fits many.

Beyond those, the strategies we work with include like-kind property exchanges, exchanges paired with a deferred sales trust, downsizing structures, and arrangements built around caring for aging parents. Each has its own page on this site, which is deliberate, because they are not interchangeable.

Reducing the gain rather than deferring it

Two things belong here and both are routinely left out of articles on this subject.

The first is basis. Every capital improvement you made and every cost of sale reduces the gain, and depreciation you took increases it through recapture. Getting the basis right before you model anything else is not a strategy, it is arithmetic, and it is where the largest errors happen. A cost segregation study works the other end of the same lever on property you are keeping, by accelerating depreciation deductions rather than by touching the sale.

The second is rate. The IRS sets out the current picture in Topic 409. Long-term capital gain is taxed at 0%, 15% or 20% depending on total taxable income, with the 0% band applying where taxable income for 2025 is at or below $48,350 for single filers, $96,700 for married couples filing jointly, and $64,750 for head of household. And the portion of gain that is unrecaptured section 1250 gain from selling real property is taxed at a maximum of 25% regardless of which band you are in, which is the recapture that surprises landlords.

Rate is also why timing matters. A sale that straddles a year in which your other income is unusually low is a different transaction from the same sale a year earlier, and the time to talk that through is before the property is listed.

The mistake almost everybody makes first

People pick the strategy before they know the number.

It happens in a predictable order. A seller hears about a 1031 exchange, decides that is what they are doing, and only later works out that the gain is smaller than they feared, or larger, or that most of it is recapture rather than appreciation. By then decisions have been made that are hard to unwind, and the deadline is running.

The number to establish first is straightforward. Take the expected net sales price, subtract the adjusted basis, and separate what within the gain is appreciation from what is depreciation being recaptured. Those two components are taxed differently, which means a strategy that handles one well may handle the other badly. Knowing the split changes which of the seventeen strategies is worth discussing at all.

The second thing to establish is what you want the money to do. An investor who wants to keep compounding in real estate, an owner who wants out and wants income, and an owner who wants a lump sum for something else are three different problems, and the fact that they all start with a property sale does not make them one problem.

What rules each option out

The fastest way through a menu this size is elimination, and each route has a clean disqualifier.

An exchange is out if you want the cash rather than more real property, or if the property was held primarily for sale rather than for investment.

The main home exclusion is out if the property was not your residence for at least 24 months of the previous five years, or if you used the exclusion on another home inside the last two years.

An Opportunity Zone investment is out if you cannot commit the gain within the statutory window or cannot hold for the period the rules require.

A trust structure is usually out if the sale has already closed with the proceeds in your hands, which is why, more often than anything else, we have to tell somebody there is nothing left to do. Almost every one of these strategies has to be in place before closing, and the ones that do not are the exceptions rather than the rule.

Run those five disqualifiers against your own sale and the whole menu usually reduces to two or three in about ten minutes.

Which one fits

The short version is that it depends on three things. What the asset is, whether you want to stay invested, and how much time you have.

If you are selling investment real estate and want to stay in real estate, an exchange is usually the starting point. If you want out of real estate, look at the trust structures instead. If you are selling a home you have lived in, check the exclusion first. And if you are already inside a 45 day identification window with nothing identified, call somebody today rather than tomorrow, because the menu shrinks by the day.

We are not CPAs or tax attorneys. We are nationwide educators on the subject of tax deferral, and we work alongside your accountant rather than instead of them, which is precisely why we can lay the whole menu out rather than argue for one item on it.

If you want to talk through which of these fits your sale, you can book a consultation, and there are more answers to the questions that come up most.

A note on the figures above. We are not CPAs or tax attorneys. The rates and thresholds cited come from the IRS pages linked and are current for 2025, and tax figures are adjusted regularly. Do not use any of this for your personal financial situation without speaking with a tax professional.

FAQ

Who qualifies for 0% capital gains?

Per IRS Topic 409, the 0% long-term capital gains rate applies where total taxable income falls at or below a threshold that is adjusted each year. For taxable years beginning in 2025 those thresholds are $48,350 for single filers and married filing separately, $96,700 for married filing jointly and qualifying surviving spouse, and $64,750 for head of household. Note that it is total taxable income that is tested, so a large gain will often push a seller out of the band that the gain itself was meant to sit in.

How can I avoid paying capital gains tax on the sale of a second home?

A second home is the awkward middle case. The main home exclusion under IRS Topic 701 turns on ownership and use tests, so a property you have not lived in for at least 24 months of the previous five years will not qualify. A like-kind exchange requires property held for productive use in a trade or business or for investment, so a genuine second home used personally does not qualify for that either. The workable routes usually involve either changing the character of the property well in advance of a sale, or a structure that does not depend on it being investment property at all. This is a case to take advice on early rather than at closing.