Can You Defer Capital Gains Taxes Without a 1031 Exchange into a New Property?
Published August 4, 2022Share this article
The 1031 exchange from one property into a new investment property is one of the most popular investment strategies for real estate owners. However, that doesn't mean it's the best for you.If you want to build long-term wealth by deferring your capital gains taxes, you have options. Depending on your investment goals, some alternatives might be better than a traditional 1031 exchange.Are you tired of actually being a landlord? In that case, a 721 or Delaware Statutory Trust (DST) might be better choices, and they'll still help you defer your capital gains tax.Below, we'll walk you through the 3 best ways to defer capital gains taxes without needing to buy a new investment property. But before we jump into that, let's cover why you might want to defer capital gains taxes in the first place.
Why Defer Capital Gains Taxes?
First, none of these strategies allow you to avoid taxes—they let you defer taxes. But, you’ll get to do it on your own schedule, which might include holding onto your assets until you pass them onto your heirs (who may benefit from a step up in basis).Here are a few reasons you might want to defer capital gains taxes:- Capital gains taxes are expensive: Including state and federal taxes, your capital gains tax could be as high as 20% of your profits (check out this calculator), depending on your income bracket. And if you sell your property for a short-term capital gain, it could be up to 37%. Ouch
- You might already be in a high tax bracket: If you're in a high-income bracket, it might be more advantageous to defer your taxes until a year (or years) when you have a lower income. For example, the timing might be better during a year when you or your spouse quit your full-time jobs or after you decide to retire.
- Expand your investments faster: Fewer taxes means you can keep putting your money to work. When you defer capital gains taxes, you have additional cash to enable your portfolio to grow at a faster rate.
- Pass on assets to your heirs: If you pass away, your beneficiaries aren't responsible for paying capital gains taxes on the assets they inherit. Instead, they will receive the property at the current market value according to a step-up in cost basis. While you can’t avoid taxes, it’s possible your heirs can.
3 Ways to Defer Capital Gains Taxes Without a Traditional 1031 Exchange
A 1031 exchange lets you swap your rental property for another like-kind asset. This could mean exchanging a rental property in one state for a similar one in another state, or trading a single-family home for an apartment building.However, regardless of the property you exchange, you're still acquiring a new piece of property that needs time, work, and care. You'll likely need to find tenants or work with a property manager, and you’ll always need to worry about repairs and maintenance.It's a lot of work, especially if you're just concerned about deferring your capital gains taxes. Fortunately, there are other ways to defer your taxes. Here are our favorites:1. 721 Exchange
A 721 exchange lets you exchange your rental property for interest in an Operating Partnership (often times classified as a Real Estate Investment Trust). You get shares in a portfolio of professionally managed homes, and the swap doesn't trigger a taxable event.For example, when you do a 721 exchange with Flock, you trade your property for shares in our portfolio of Single Family Rentals equal to the value of your home equity. The property isn't your concern anymore—you don't have to worry about tenants, garbage, home repairs, or any other headache associated with managing a property. We'll honor existing leases you have with tenants at the time of the exchange.A 721 exchange doesn't just help you defer your capital gains tax—it also provides you with an opportunity to earn regular income and long-term appreciation. Most real estate funds are similar to Flock and give you many of the benefits you had as an individual-owner, so you can still access quarterly cash flow and upside potential as a shareholder rather than a landlord.2. 1031 Delaware Statutory Trust (DST) Exchange
As discussed above, one of the keys to a 1031 Exchange is the concept of a “like-kind” property. Most often, owners 1031 directly into a new single property. A DST is a type of trust that often qualifies as like-kind exchange. Owners who 1031 into a DST take the equity proceeds from their investment property sale and exchange them for shares in DST, and as a result, go from being an active investor to a passive one, all while deferring taxes.As with most other real estate portfolios or funds, DSTs typically pay regular dividends, and your interest will appreciate with the price of the underlying assets. And they’re totally passive, so you won't have any of the hassles of traditional property ownership. However, DSTs aren't usually a liquid investment like shares in an Operating Partnership or REIT. You likely can't just sell your DST interest because the DSTs don’t grow over time.3. Qualified Opportunity Zone Funds
The US government designates certain underserved or struggling geographic areas as Qualified Opportunity Zones (QOZs). These areas generally have higher investment risk, but the government provides tax deferrals and other incentives to encourage individuals to invest in these communities.When you sell a rental property and use the proceeds to purchase a property in a QOZ through a qualified opportunity fund (QOF), you can defer capital gains taxes on your sale's profits. Your deferral stays in effect until the QOF investment is sold or exchanged or until Dec 31, 2026—whichever comes first.Start Building Your Long-Term Wealth
Want to defer capital gains taxes without a traditional 1031 exchange? You've come to the right place.Flock is a finance and real estate technology company that specializes in real estate exchange. We help landlords retain all the benefits of real estate ownership while saying goodbye to the burdens of ownership—we keep the entire process simple and cost-effective.Here's how it works:Share details about your property. We'll provide you with a free, no-obligation valuation in less than 24 hours. We’ll help determine if your property is a better 721 or 1031 DST candidate and we’ll walk you through the entire process of both. In either scenario, you’ll get shares in Flock's portfolio of homes and begin receiving quarterly cash flow. You can stick with Flock forever and receive quarterly cash flow while your shares appreciate, or you can wait a few years to begin liquidating your shares. Your choice.Ready to get started? Share your property details here to kick-start the process. We’re excited to explore if Flock is the right choice for you!Landlords, retire and minimize taxes.
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