This article was posted on Sunday, Jan 01, 2023
Avoid Capital Gains

Never has there been so much pressure on Californian residents to pay more in taxes. It seems like the barrage of proposed new taxes and tax rate increases strengthens with each passing year. Not all proposals will be implemented, and many will be tried in court, however, there is a clear trend toward increasing the tax burden.

Assembly Bill 1253 introduced in February 2021 and California Proposition 30 on the November 2022 ballot are both examples of proposed increases that would have significantly increase tax rates via the following structure:

  • An additional 1% tax on income above $1 million, but not over $2 million
  • An additional 3% tax on income over $2 million, but not over $5 million
  • An additional 3.5% tax on income over $5 million

While these income brackets seem high, do not forget the gain on the sale of investment real estate is included in the amount of income subject to the tax. Fortunately, neither proposal will be moving forward, for now. However, the trend toward increasing taxes is clear, even during a time in which the State of California entered a budget cycle with a $97.5 billion surplus. 

In order to alleviate some of the anger invoked in most property owners when they discover their tax bill may, or will increase, we have compiled a list of tax deferral strategies that are worth considering should you decide to sell your investment property.

Sell and 1031 Exchange Your Property

A well-known option, a 1031 Exchange allows an owner to defer all tax associated with the sale of investment property other than excise tax. Many owners are under the perception that an exchange must be between two investment properties of the same type – such as a triplex for a triplex. This is not the case. Instead, the IRS states the property is considered “like-kind” so long as it is investment property of any sort, regardless of property type. There is quite a bit of flexibility within 1031 Exchanges for those who know how to navigate them effectively. There are also quite a few stumbling blocks that can trip investors up while performing an exchange. One major tax benefit to exchanging investment real estate is that if you hold real estate until you or your spouse pass away, you will realize a “step-up in basis,” eliminating all capital gains and depreciation recapture tax liability deferred to that date. Furthermore, the deferred tax can be viewed as an “interest-free loan” from the government – allowing you to earn income off your entire investment amount.

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Sell and Utilize an Installment Sale

Another commonly presented option is the installment sale. Generally, we do not recommend this approach unless the seller is receiving a premium in the sales price for accepting an installment contract. There are risks associated with this method, such as the buyer’s ability to make the payments promised and the condition of the property should it need to be repossessed. This method spreads out the capital gain tax associated with the sale throughout the life of the installment contract, however it typically does not allow for deferral of the depreciation recapture tax. It should also be noted that there is an unfavorable tax treatment, should the seller pass away during the note payment period. 

Sell and 1031 Exchange Property to be 721 UPREIT

An option we recommend to investors when they may not want to be permanently invested in real estate, value liquidity, and would still like to mitigate tax consequences, is to 1031 Exchange into a property that will be absorbed by a Real Estate Investment Trust (REIT) after a period of time. This approach allows the best of both worlds because the seller is not exposed to the buyer’s performance over multiple years, the exchange dollars will eventually convert to REIT shares in approximately two years’ time, and, most importantly, the seller can then choose to sell their REIT shares as they please – allowing the flexibility to sell when they are in a lower tax bracket or when they need the liquidity.

Sell and 1031 Exchange into An Eventual New Primary Residence or Vacation Home

Lastly, if a seller is interested in the eventual purchase of a new primary residence or vacation home, they have the option to 1031 Exchange into this property using proceeds from the sale of an investment property. This approach allows for repurposing investment real estate equity to personal use real estate; however, it is very important that the newly acquired property (either a primary residence or vacation home) be rented out for one to two years following the exchange so that it first qualifies for 1031 Exchange purposes. The properties do not need to be rented for the entire year; however, “personal use” limitations do apply during this one to two-year period.

Benjamin Franklin once famously wrote, “In this world, nothing can be said to be certain, except death and taxes.” Our firm works diligently on behalf of investment property owners to address taxes and make sure real estate transitions (sales, charitable contributions, estate giving, etc.) happen in a tax-efficient manner for our clients. Even with the threat of increased and new taxes looming large, there are strategies we would be pleased to explain further to you, should you be considering a transaction in 2023.

 If you are selling your investment property and would like to learn more about tax-deferred 1031 Exchanges and Delaware Statutory Trusts, contact Real Estate Transition Solutions to schedule a complimentary consultation with one of our FINRA-licensed 1031 Exchange Advisors. Our consultations are informal and can be done via phone, via web conference, or in person at one of our offices. To schedule your consultation, call 888-286-5395 or visit us at  


As Chief Exchange Strategist, Austin Bowlin leads the firm’s team of licensed 1031 Exchange advisors & analysts and provides consultation on tax liability, deferral strategies, legal entity structuring, co-ownership arrangements, 1031 replacement property options, and Delaware Statutory Trust investments.  

Real Estate Transition Solutions is a consulting firm specializing in tax-deferred 1031 Exchange strategies and Delaware Statutory Trust investments. For over 26 years, they have helped investment property owners perform strategic 1031 Exchanges by developing and implementing well-planned, tax-efficient transition plans carefully designed to meet their objectives. Their team of licensed 1031 Exchange Advisors will guide you through the entire exchange process and help you select 1031 replacement properties best suited to meet your goals. To learn more about Real Estate Transition Solutions, call 888-286-5395 or visit our website at  


IMPORTANT INFORMATION: The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsor’s Private Placement Memorandum (PPM), which is solely available to accredited investors and accredited entities. Case studies and examples are for illustrative purposes and not representative of future results. There are risks associated with investing in real estate properties, including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, and illiquidity. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Securities offered through Aurora Securities, Inc. (ASI), member FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a registered investment advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.