13 Years (Part 3/Bonus): A Crash Course in Avoiding Real Estate Taxes
In the year leading up to selling our rentals, I researched every legal way to escape the exit-tax shakedown. Here are the main strategies I found for avoiding taxes, with a quick explanation of each each method, who it’s good for, and why we ultimately didn’t use it.
1. 1031 Exchange
What it is: This might be the ultimate loophole in the US tax code. The generous 1031 provision lets you sell one investment property and buy a larger one without paying any capital gains taxes on the sale. The taxes are deferred indefinitely.
Good for: People who want to double down on real estate with incredible efficiency.
Why we didn’t do it: We were trying to exit real estate, not get deeper into it. A 1031 exchange sends you deeper into the game.
2. 1031 → Future Primary Residence
What it is: You can’t directly 1031-exchange into a primary residence (a house you live in). But you can:
1031 into an investment property you might want to live in someday.
Rent the house out for two years.
Move into the house.
Live there long enough for your capital gains to disappear
Good for: People who want to upgrade their long-term home and are willing to follow through on the multi-year plan.
Why we didn’t do it: We almost did this one. The catch for us was that the replacement property would have needed to be expensive for the exchange to work with our numbers. If you know us, we value freedom and flexibility far more than some sort of ‘dream house’ that would tie us down financially (and geographically). So we passed.
3. Delaware Statutory Trust (DST)
What it is: A 1031 exchange into a passive real estate investment.
You 1031-exchange your sale proceeds into a DST (a pooled real-estate investment).
This keeps your gains tax-deferred while removing the landlord headache.
Good for: Older investors, hands-off real-estate investors, and people planning to stay in real estate but want it passive.
Why we didn’t do it: The projected returns (typically 3–7%) are lower than the stock-market and your money is locked up as long as the syndicator wants to hold onto it. As younger-ish investors, it made more sense to take the tax hit now for the chance of higher growth moving forward.
4. Syndication Roll-In (Tenant-in-Common)
What it is: Similar to DSTs, some real-estate syndicators let you roll your 1031 funds into their deal as a “TIC” investor- if your sale is big enough to justify the extra paperwork for them.
Good for: People with large gains who want passive real-estate exposure through a specific operator.
Why we didn’t do it: Open Door Capital was willing to take us, but after research, we weren’t comfortable tying a massive chunk of our net worth to a single syndicator (and things have gone pretty rough for syndicators lately).
5. Charitable Remainder Trust (CRT)
What it is: If you’re willing to agree to donate the proceeds to charity when you die, you can sell your property tax-free, invest the proceeds, and then take distributions from the investment for the rest of your life. Here’s how it works:
The (untaxed) money from the sale goes into a “charitable remainder trust” in which you can invest the proceeds however you see fit.
For the rest of your life, you are free to take monthly distributions from the trust.
Many ways to structure this (CRAT, CRUT, nimCRUT, etc. etc.)
Whatever remains at the end of your life goes to a charity of your choosing.
Good for: Older, charitably minded individuals—especially those without kids. There’s an age sweet-spot where it becomes very likely that you’ll outlive the IRS distribution tables and receive more in lifetime payouts than you would from selling outright. The net result could be that you walk away with more money and your ‘would-be-tax-money’ goes to a good cause rather than senators’ trust funds, the war machine, Somali terrorists(?), etc.
Why we didn’t do it: I was too young according to “the IRS table”.
Conclusion
These preceding strategies can be powerful when matched to the right stage of life and long-term plan. In our case, none of them aligned with our goals, risk tolerance, or desire to simplify and be free. So we paid the six-figure tax bill, freed up our time and headspace, and moved on.
If you’re facing a big sale, exploring these options might save you tens or hundreds of thousands. Just know that every path comes with tradeoffs, timelines, and fine print.