There are different ways to build wealth, and you may have put in long hours growing a business or building an investment portfolio. At this point, you’re likely interested in preserving and growing your accumulated wealth. However, as my clients often share with me, there can be challenges related to accessing your hard-earned funds. These come in the form of capital gains tax.
The good news is that I have studied and developed strategies to help high net worth individuals manage the tax implications they face. With the right planning, you can defer capital gains taxes and in some cases reduce them and potentially eliminate them as well. In the following sections, I’ll share some of these capital gains tax deferral strategies that high-net-worth individuals like yourself use to keep more of what they earn. From 1031 exchanges to Opportunity Zones, installment sales to tax-efficient portfolio diversification, you’ll learn how to take control of your financial future with tax planning.
Understand Capital Gains Tax
Capital gains taxes are imposed on the profit from the sale of an asset. For long-term gains (assets held longer than a year), federal rates range from 15% to 20%, with an additional 3.8% Net Investment Income Tax (NIIT) often applying. If you’re in a high-tax state, that figure can easily climb to 30% or more.
When you’re selling a business, capital gains taxes can be even more complex, depending on how your sale is structured. There are different rules related to asset sale vs. stock sale, C-corp vs. S-corp, and so on. You’ll want to work with a professional who understands the differences and knows how to handle your unique situation.
1031 Exchanges for Real Estate Investments
If you’re selling an investment property, a 1031 exchange can be a way to defer capital gains taxes. This IRS-sanctioned method allows you to reinvest the proceeds from the sale of one property into another “like-kind” property. In doing so you defer taxes until the final property is sold without an exchange.
You can repeat 1031 exchanges indefinitely, compounding your investments over time. Eventually, you might even pass on the property to your heirs. They in turn could receive a step-up in basis, which could potentially eliminate the capital gains tax entirely.
You’ll need to meet certain requirement, including:
- You must identify the replacement property within 45 days.
- You must complete the purchase within 180 days.
- A qualified intermediary must hold the proceeds during the exchange.
A tax professional who is aware of the details and understands your situation can lay out options so you can make informed decisions.
Installment Sales When Selling a Business
If you’re a business owner who wants to exit, an installment sale can reduce taxes when selling a business. Instead of receiving a lump sum, you accept payments over time. This allows you to recognize and pay taxes on the gain gradually, rather than all at once.
Spreading out the recognition of gain can lower your annual income and potentially keep you in a lower tax bracket. Plus, you can negotiate favorable interest on the unpaid portion of the sale. This could create an additional income stream.
If you are considering an installment sale, keep the following in mind:
- The IRS will require you to pay taxes on the interest earned.
- Some depreciation recapture rules apply if you’re selling depreciated assets.
- This method requires confidence in the buyer’s ability to pay over time unless you use an intermediary to hold funds post sale to avoid constructive receipt.
If you’re handing over your company to a family member or key employee, an installment sale may align with both your tax and succession goals.
Advantages of Qualified Opportunity Zones
The 2017 Tax Cuts and Jobs Act introduced Opportunity Zones, which lay out ways to defer and reduce capital gains taxes while supporting underserved communities. Now, the President’s One Big, Beautiful Bill has made Opportunity Zones a permanent part of the tax code. To get involved, you roll over a capital gain from an asset into a Qualified Opportunity Fund (QOF) that invests in Opportunity Zones. This gives you a deferral of your capital gains tax until December 31, 2026 (or when you sell the QOF investment—whichever comes first). If you hold the QOF investment for at least 10 years, you pay no capital gains tax on the QOF’s growth.
If you are thinking of investing in a QOF, be aware that the investment must be made within 180 days of realizing your original gain. Also you’ll need to invest through a QOF, not directly into an Opportunity Zone property.
With the passing of the Big beautiful bill code 1400z and QOZF became a permanent part of the code. The rules are being adjusted slightly with new zones and deferral periods being created so understanding how this program works is more important than ever.
Structured Trusts and IRC 453 Dealer Managed Installment Sales
Another option for deferring capital gains is the use of structured trusts, such as an IRC 453 Dealer Managed Installment Sale (DMIS). A 453 DMIS allows you to transfer an appreciated asset to a trust before the sale. The trust sells the asset, and instead of receiving the full sale proceeds immediately, you receive payments over time, deferring taxes, much like an installment sale but with greater flexibility.
With a properly structured 453 DMIS, you can gain several benefits, including:
- You control how and when you receive the income.
- You can diversify your investments inside the trust across stocks, bonds, real estate, or other assets.
- You reduce your current tax liability, potentially smoothing your tax burden over many years.
- You eliminate the risk of a seller deferring payments indefinitely.
These tools require expert legal and financial structuring, so you’ll want to work with qualified professionals who can answer your questions and provide the information you need to make a decision.
Plan Ahead for Taxes
The best time to explore ways to reduce capital gains taxes is before you sell. Whether you’re restructuring a portfolio, transitioning out of your business, or planning your estate, there are steps that can be taken before the transaction takes place. You’ll want to have a solid advisory team in place, including a tax strategist, financial planner, and legal expert who specialize in working with high-net-worth individuals. The right team can help ensure you create a personalized, integrated plan that aligns with your long-term goals.
By using strategies like 1031 exchanges, installment sales, Opportunity Zones, structured trusts, and tax-efficient diversification, you can defer, reduce, or eliminate capital gains taxes. If your tax professional hasn’t reached out to you regarding your options, it might be time to explore a second opinion.