Are there any tricks with limiting capital gains taxes when selling?

Member since 2020 · 25 posts · 11 votes

I am not going the 1031 route as my goals don't align with the requirements for the 1031, i.e. I need to downgrade from a multi-family (which has a sizable loan) and use the equity to purchase a new home of much smaller value with less and/or no mortgage for now.

Due to this, I'm expecting a significant capital gain. The property is held by a holding LLC and I can declare losses from other properties perhaps that could help here perhaps but they aren't significant. Is there anything out of the box I can incorporate leading into this sale that would be significant?

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Ken M.

Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes

10mo

Quote from @Peter Li:

You can use installment sales to defer some of the capital gains.

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Janet Behm
Accountant · West Jordan, UT · Member since 2017 · 182 posts · 95 votes
10mo
Peter,
You are sitting in the "catbird seat."
Go to the blue bar near the top of this page, BUILD YOUR INVESTING TEAM.
You don't need 'out of the box.' You need a guide who understands you and your circumstances. The money they save you will more than pay their fee!
Find a RE competent TAX PRO.
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G. Brian DavisPro Member
Investor · Hatboro, PA · Member since 2016 · 3k+ posts · 903 votes
10mo
Hi @Peter Li, if a 1031 isn't a fit, the goal becomes reducing the tax hit rather than deferring it. Before selling, it's worth reviewing whether additional depreciation can be captured through cost segregation, accelerating legitimate expenses, or timing the sale in a year when your overall income is lower. Depending on the buyer and structure, an installment sale could spread the gain over multiple years, and certain charitable or estate-planning strategies may help if they align with your goals. Given the complexity and the LLC structure, running projections with a real estate–focused CPA before listing is the best way to identify options that could make a meaningful difference.
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Ken M.
Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
10mo
Quote from @Peter Li:

I am not going the 1031 route as my goals don't align with the requirements for the 1031, i.e. I need to downgrade from a multi-family (which has a sizable loan) and use the equity to purchase a new home of much smaller value with less and/or no mortgage for now.

Due to this, I'm expecting a significant capital gain. The property is held by a holding LLC and I can declare losses from other properties perhaps that could help here perhaps but they aren't significant. Is there anything out of the box I can incorporate leading into this sale that would be significant?
You can use installment sales to defer some of the capital gains.
3 Reply
Gregory Wilson
Member since 2024 · 238 posts · 132 votes
10mo
Die first then sell. Seriously, this is a big problem slowing down the market in that owners holding appreciated property know that hold till death is the silver bullet.
1 Reply
Aaron ZimmermanBusiness Member
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
10mo
If you have other portfolios in your property, you could offset capital gains and depreciation recapture. Additionally, passive losses you've built up on that property and other properties could help. I'd recommend reaching out to a cpa to help you plan this out. With year end approaching, you'll want to do this sooner than later
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
10mo
Buy another property and start a rehab on it in the same year that you sell the other property. This will usually cancel out a very significant amount of the taxes assuming you do it all from the same LLC or are a real estate professional tax status. I am both.
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  10mo
  Quote from @Henry Lazerow:
  
  Buy another property and start a rehab on it in the same year that you sell the other property. This will usually cancel out a very significant amount of the taxes assuming you do it all from the same LLC or are a real estate professional tax status. I am both.
  
  Rehab on a property is not a tax deduction, with a possible partial exception for a rental property completed and placed in service in the same year.
  0 Reply
Fulton Abraham Sanchez
CPA| New Clients Welcome| 50 States · Member since 2016 · 440 posts · 97 votes
10mo
@Peter Li, hi. Even if a 1031 doesn't fit your goals, you may still have meaningful ways to reduce or manage the tax hit from a large gain, especially by modeling depreciation recapture separately from capital gain and considering strategies like an installment sale (to spread gain over multiple years), reinvesting the gain portion into an Opportunity Zone fund, doing a pre-sale cost segregation/catch-up depreciation analysis, reviewing renovations for partial asset dispositions and proper repairs vs. improvements treatment, and using charitable planning if it aligns with your giving; the LLC itself usually doesn't eliminate the gain, so the best next step is to run numbers based on purchase price, current value, depreciation taken, and your income bracket to see what's truly "sinificant."
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Gregory SchwartzBusiness Member
Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
10mo
Move in for 712 days
[email protected]443-812-0357
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  10mo
  Quote from @Gregory Schwartz:
  
  Move in for 712 days
  
  This can partially reduce but not eliminate capital gain taxes. The rule that you are referring to (2 out of 5 years) works for temporary renting of former residences, not for moving into a rental that has never been your residence before.
  1 Reply
- Gregory SchwartzBusiness Member
  Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
  10mo
  @Michael Plaks I should have included my disclaimer.
  I'm not a tax professional or CPA. Just a real estate enthusiast with a third grade understanding of tax law
  [email protected]443-812-0357
  Schwartz Realty Group5118 Reviews
  Website View Page
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- Michael PlaksPro Member
  Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
  10mo
  Quote from @Gregory Schwartz:
  
  @Michael Plaks I should have included my disclaimer.
  I'm not a tax professional or CPA. Just a real estate enthusiast with a third grade understanding of tax law
  
  I would not underestimate 10-yr-olds in 2025 ;)
  
  2 Reply
- Steve K.
  Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
  10mo
  Quote from @Michael Plaks:
  
  Quote from @Gregory Schwartz:
  
  Move in for 712 days
  
  This can partially reduce but not eliminate capital gain taxes. The rule that you are referring to (2 out of 5 years) works for temporary renting of former residences, not for moving into a rental that has never been your residence before.
  
  What if they were to 1031 into a new property that they eventually plan to live in but rent it in the meantime in order to comply with the like-kind investment property requirement of a 1031, then move in and convert it to their primary for the minimum 2 years and claim section 121? Just spit-balling ideas here...
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
10mo
My CPA makes it largely a write off. When you buy a property and are rehabbing it there are a lot of losses that knock down that years taxes. I am a real estate professional tax status so get write off depreciation towards my non re income also.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
10mo
Quote from @Peter Li:

I am not going the 1031 route as my goals don't align with the requirements for the 1031, i.e. I need to downgrade from a multi-family (which has a sizable loan) and use the equity to purchase a new home of much smaller value with less and/or no mortgage for now.

Due to this, I'm expecting a significant capital gain. The property is held by a holding LLC and I can declare losses from other properties perhaps that could help here perhaps but they aren't significant. Is there anything out of the box I can incorporate leading into this sale that would be significant?

Step 1 - figure out the expected tax hit, preferably with professional help, to be accurate. Often it is not as big as investors expect. Of course, the other way around is also possible: a harsher hit than you expect. But you need to know how much taxes you're facing before planning how to address it.

Step 2 - consider your overall goals and preferences. Sometimes, you might actually want to pay tax rather than mitigate it - if it leads to better investment opportunities.

Step 3 - consider alternative investment ideas that come with large first year deductible losses, for instance some syndications, if they fit your overall goals. However, given that you're trying to extract cash for a free-and-clear acquisition, maybe it's not meeting your goals.

Step 4 - consider various borrowing sources before concluding that cash purchase is your best/only option.

Step 5 - only then look for tax deferral strategies. Search this forum for "installment sales", "deferred sales trusts", "monetized installment sales" and "private annuities" - all of which should be treated with an abundance of caution and thorough due diligence. Many professionals will recommend avoiding this minefield altogether, other than conventional installment sales aka owner financing.
1 Reply
Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
10mo
@Peter Li, this is a question a lot of investors run into, and you’ve already gotten some great answers here. For clients in your situation, we usually look at things like an installment sale or potentially buying and rehabbing another property instead of doing a straight sale.

If your income is higher than normal this year, it can also help to stack deductions around the sale, things like retirement plan contributions, charitable planning if you itemize, or even losses from stocks. Those don’t eliminate the tax, but they can definitely soften the blow.

The main thing is that you do have options, especially since you already own other real estate. What makes the most sense really depends on what your other income streams look like and what else you have going on financially this year.

Like others have mentioned, I’d strongly recommend talking with a CPA who specializes in real estate. There are a lot of good ones in this group, and it’s worth interviewing a few. Happy to connect if you want.
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Rohullah Sharifi
Dr · VA · Member since 2025 · 154 posts · 35 votes
10mo
First and foremost, there are no “tricks” involved. As tax professionals, we provide guidance solely on lawful options available under the Internal Revenue Code. I would recommend that this matter be discussed thoroughly with a qualified tax professional to ensure proper compliance. I am available to assist with that process.
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Max Segal
Specialist · Chicago, IL · Member since 2025 · 15 posts · 4 votes
10mo
Yeah - do a 1031 !
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