Capital Gains Tax Deferral:
Exit the 1031 Treadmill
You've built something valuable—a successful business or real estate portfolio worth millions. Now learn how to access that wealth without losing a third of it to taxes.
The Capital Gains Problem
For Business Owners
You've spent 20+ years building a business worth $5-$50 million. When you sell:
| Federal Capital Gains | 20% | $2,000,000 |
| Net Investment Income Tax | 3.8% | $380,000 |
| State Tax (CA example) | 13.3% | $1,330,000 |
| TOTAL | ~37% | $3,710,000 |
After working for decades, you could lose nearly $4 million to taxes in a single year.
For Real Estate Investors
You've built a portfolio worth $2-$20 million through smart investing and 1031 exchanges. But you're tired:
The 1031 Treadmill:
- Can't access equity without triggering taxes
- Must find replacement property in 45 days
- Must close within 180 days
- Each exchange increases deferred gain
- Depreciation recapture keeps growing
If You Stop:
Combined tax bill could be 30-40%+ of your equity. You're trapped.
Capital Gains Deferral Strategies
Installment Sales (Section 453)
Spread capital gains across multiple tax years by receiving payments over time.
Benefits:
- ✓ Stay in lower tax brackets
- ✓ Defer total tax bill
- ✓ No geographic restrictions
Limitations:
- • Still pay taxes (just spread out)
- • Buyer default risk
Qualified Opportunity Zones (QOZ)
Invest capital gains into QOZ Funds within 180 days. Hold 10+ years for zero tax on QOZ appreciation.
Benefits:
- ✓ Defer original gains until 2026
- ✓ Zero tax on QOZ gains after 10 years
- ✓ Potential basis step-up
Limitations:
- • Must invest in designated zones
- • Limited control
- • Political uncertainty
Charitable Remainder Trusts (CRT)
Transfer appreciated assets to irrevocable trust. Receive income for life, remainder to charity.
Benefits:
- ✓ No capital gains on sale within trust
- ✓ Income stream for life
- ✓ Charitable deduction
Limitations:
- • Irrevocable
- • Heirs don't receive remainder
- • Complex setup
Deferred Sales Trust (DST)
Sell to trust in exchange for promissory note. Receive installment payments over time.
Benefits:
- ✓ Defer gains until payments received
- ✓ Choose payment schedule
- ✓ More flexible than 1031
Limitations:
- • Complex structure
- • Third-party trustee required
- • IRS scrutiny
Section 7702 Integration
Use liquidity event proceeds to fund properly structured life insurance. Create tax-free income for life.
Benefits:
- ✓ Tax-free growth and access
- ✓ No RMDs
- ✓ Tax-free death benefit
- ✓ Creditor protection
Limitations:
- • Requires adequate funding
- • Long-term approach
1031 Exchange Alternatives:
Getting Off the Treadmill
Stopping a 1031 exchange triggers capital gains on original AND accumulated deferred gains, plus depreciation recapture taxed at up to 25%.
Example: $2.5M Portfolio Exit Cost
Better Alternatives
Delaware Statutory Trust (DST)
- ✓ Qualifies as 1031 replacement
- ✓ Passive ownership (no management)
- ✓ Diversification
- ✓ Step-up at death
Deferred Sales Trust
- ✓ Exit without immediate tax
- ✓ Income stream over time
- ✓ Flexible investment choices
- ✓ More options than 1031
Strategic Partial Exit
- ✓ Sell some, 1031 the rest
- ✓ Fund Section 7702 with proceeds
- ✓ Create tax-free income bucket
- ✓ Hybrid approach
Business Exit Planning: Convert Sales to Tax-Free Income
Option 1: Take the Cash
- Pay 35-40% in taxes ($3.5-4M)
- Have $6-6.5M to invest
- That $6.5M generates taxable income forever
Option 2: Strategic Planning
- Structure as installment sale (spread taxes)
- Fund Section 7702 systematically
- Create tax-free income stream
- Tax-free access to wealth
The Strategic Approach Math ($10M Business Sale)
Depreciation Recapture: The Hidden Tax Bomb
Most real estate investors focus on capital gains and forget about depreciation recapture— taxed at up to 25%, higher than capital gains rates.
Example:
- Owned property 10 years
- Claimed $250,000 in depreciation
- Sell property
- Owe $62,500 in depreciation recapture (25%)
- PLUS capital gains on appreciation
Strategies to Minimize:
Who Should Consider These Strategies?
💼 Business Owners
- Planning to sell in next 1-5 years
- Business value $5M-$50M+
- Want to convert liquidity event to ongoing income
- Concerned about single-year tax hit
- Want flexibility and control
🏠 Real Estate Investors
- Portfolio $2M-$20M+
- Tired of 1031 exchange treadmill
- Want to access equity without tax disaster
- Concerned about depreciation recapture
- Ready to diversify beyond real estate
Common Questions
Can I really defer capital gains indefinitely?
Several strategies allow long-term or indefinite deferral. 1031 exchanges, Qualified Opportunity Zones (10+ year hold), and Delaware Statutory Trusts can defer gains until death, when heirs receive stepped-up basis.
What's the difference between deferral and elimination?
Deferral postpones taxes; elimination avoids them entirely. Step-up in basis at death can effectively eliminate deferred gains for heirs. Section 7702 strategies create tax-free income without future tax liability.
Are these strategies legal?
Yes. These are established provisions of the Internal Revenue Code. 1031 exchanges (Section 1031), installment sales (Section 453), and life insurance tax treatment (Section 7702) have been law for decades.
How do I choose the right strategy?
It depends on your situation: timeline, income needs, estate planning goals, risk tolerance, and tax circumstances. A combination of strategies often works better than any single approach.
Do I need a team of professionals?
Yes. Capital gains strategies require coordination between CPAs, attorneys, financial advisors, and insurance specialists. We coordinate all parties to ensure proper structure.
Don't Let Taxes Destroy Your Wealth
In a complimentary Capital Gains Strategy Session, we'll:
- ✓ Review your specific situation (business sale or RE portfolio)
- ✓ Calculate your current tax exposure
- ✓ Identify applicable deferral strategies
- ✓ Create a preliminary action plan
- ✓ Connect you with the right professionals
No pressure. No obligation. Just clarity on your options.