1. Capital gains and the OBBB

Question: Did the “One Big Beautiful Bill” (OBBB) make any changes to the existing federal income tax rates on capital gains?

Joy Taylor: No. Although the OBBB, which was enacted on July 4, 2025, has over 100 tax sections, there are no big changes to the taxation of capital gains. Some Republican lawmakers and free-market groups backed the idea of indexing capital gains to inflation each year, but this didn’t make it into the law. Others wanted a 15% top federal capital gains tax rate. But this proposal was also not included.

2. Tax rates on capital gains

Question: What are the federal income tax rates for capital gains for 2025 and 2026

Joy Taylor: Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are generally taxed at 0%, 15% or 20%. The rates are based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends. Here are the income thresholds for 2025:

• The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
• The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Here are the income thresholds for 2026 tax returns that you would file in 2027:

• The 0% rate applies at taxable incomes up to $49,450 for single filers, $66,200 for head-of-household filers and $98,900 for joint filers.
• The 20% rate starts at $545,501 for single filers, $579,601 for head-of-household filers and $613,701 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%.

Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates up to 37%.

3. Stock mutual funds and capital gains distributions

Question: I invest in stock mutual funds. Every year, I pay a lot of tax on capital gains distributions from these funds at ordinary income tax rates. I’m told by my accountant that this income doesn’t qualify for the lower tax rates on long-term capital gains. Why is this the case?

Joy Taylor: As briefly mentioned in question 2, net short-term capital gains are taxed at ordinary income rates up to 37%. This applies to gains from the sale or exchange of capital assets held for a year or less, which can include capital gains distributions from stock mutual funds. Some of these funds frequently buy or sell holdings that can potentially generate big short-term capital gains distributions.

Before you invest in a stock mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions. One way around this hazard is to keep high-turnover stock mutual funds in an IRA or another tax-deferred account instead of in a taxable investment account.

4. Capital gains and state taxes

Question: Do all states tax capital gains in the same manner as the IRS?

Joy Taylor: No. Assuming your state will follow the federal tax treatment of capital gains is a mistake. Some states don’t have favorable capital gains rates, instead taxing investment income at the same rates as wages and ordinary income. A few states have preferential tax rates. And a handful don’t even tax capital gains at all. So be sure to understand your state’s tax treatment of capital gains.

5. Capital gains and the 3.8% NII tax

Question: I sold lots of investments this year for large gains. Will I have to pay the extra 3.8% surtax on top of the regular federal income taxes on my capital gains?

Joy Taylor: Maybe. The additional 3.8% net investment income tax (NII) applies to single filers with modified adjusted gross income (AGI) over $200,000 and to joint filers with modified AGI above $250,000. The modified AGI threshold is $125,000 for married people filing separate tax returns. Trusts and estates can also be hit with the NII tax if their 2025 modified AGI exceeds $15,900 and they have undistributed net income. These modified AGI amounts aren’t inflation-indexed, leading to more filers paying the NII tax each year.

The NII tax, which is added to the regular income tax, is due on the smaller of NII or the excess of modified AGI over the threshold amounts. NII includes dividends, capital gains, taxable interest, annuities, royalties, passive rents and certain income from other passive activities.

Here are a few ways to keep the NII tax at bay: Invest in municipal bonds, which generate tax-free interest income for federal tax purposes. If possible, use an installment sale to spread out a large capital gain over several years. Also, try to keep your modified AGI below the $250,000/$200,000 thresholds so that the 3.8% NII tax won’t even kick in.

6. 0% rate on long-term capital gains

Question: I know there is a 0% rate on long-term capital gains and dividends. But how does one qualify for this rate, and is there anything I should be wary of?

Answer: For 2025, if taxable income other than long-term capital gains and dividends doesn’t exceed $48,350 for single-filed returns, $64,750 on head-of-household returns or $96,700 on joint returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These income figures are a bit higher for 2026 tax returns that you would file in 2027, since they are adjusted annually for inflation. For 2026, they are $49,450 for single filers, $66,200 for head-of-household filers and $98,900 for joint filers.

Note that although these 0%-rate capital gains might not be taxed at the federal level, they do increase your adjusted gross income. Also, capital gains may be taxed differently at the state level. For example, some states tax capital gain as ordinary income.

Here are three scenarios to help illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in the taxable income amounts.

In the first scenario, the couple has $77,000 of taxable income. The full $18,000 of long-term capital gains and dividends is taxed at the 0% rate. In the second scenario, the couple has $104,000 of taxable income. $10,700 of the long-term capital gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate. In the third scenario, the couple has $120,000 of taxable income. The 0% rate doesn’t apply, and the full $18,000 of long-term capital gains and dividends is taxed at 15%.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• All Ask the Editor Q&As
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Charitable giving should feel just as joyful and natural — but for many households, it's also a moment when good intentions collide with inefficient habits.

The biggest habit that needs a rethink? Donating cash when there are far better options.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This year, with markets up and many investors holding appreciated securities, writing a check could be one of the least efficient ways to support your favorite causes.

The good news: With a little planning, you can stretch your generosity and reduce your tax bill.

Why Americans give — and why it matters now

Americans are remarkably generous people.

Whether it's supporting a food pantry, helping a local family in need or giving through a workplace program, most of us want to help — especially during the holidays.

Giving truly feeds our sense of purpose: The latest Bank of America Study of Philanthropy reports that 87% of affluent donors say charitable giving brings them joy.

But with inflation still squeezing households and many nonprofits seeing higher demand this year, the way you give matters. Advisers are urging clients not just to give — but to give smart.

Donating appreciated securities: The most powerful (and overlooked) tool

For many families, the most effective giving tool is also the simplest: donating appreciated stocks, ETFs, mutual funds, even cryptocurrency — instead of cash. Yet, most people overlook it.

When you donate long-term appreciated assets (held more than a year), you get two benefits at once:

• A charitable deduction for the full market value
• Complete elimination of capital gains tax

That combination is hard to beat.

A real-life example

Say you bought $10,000 worth of a stock 15 years ago that's now worth $50,000.If you sold it, you'd owe capital gains taxes on the $40,000 of growth.

If you donate the shares directly:

• You eliminate the entire $40,000 gain from taxation
• You receive a deduction for the full $50,000
• The charity gets the whole $50,000 — not a reduced after-tax amount

Financial adviser Keith Spencer, founder of Spencer Financial Planning in Spokane, Washington, often walks clients through this exact scenario.

"If the client wants to maintain the position," he says, "they can donate the shares and immediately repurchase them. The reset cost basis may significantly reduce long-term tax liability."

This "resetting" of cost basis is a hidden gem: It starts future gains at a higher level, trimming long-term tax drag in your taxable account.

A great fit for real-world portfolios

Many households already own perfect candidates for gifting:

• Old mutual funds with large gains
• Company stock from long careers
• ETFs bought during early-pandemic dips
• Automatic dividend reinvestment shares
• A handful of big winners in an otherwise diversified account

Even donating $1,000 of appreciated securities can be more efficient than donating $1,000 of cash.

Bonus: It helps rebalance your portfolio

If one stock or sector, such as technology, has grown too large, donating appreciated shares is a painless way to trim an overweight position — without triggering capital gains.

It's the charitable equivalent of replacing that one broken string of holiday lights: a small fix that makes everything else work better.

Meet the donor-advised fund (DAF)

For many families, the easiest way to combine tax benefits, flexibility and long-term planning is a donor-advised fund.

A DAF works like a "giving account" for your charitable life — you contribute now (cash or appreciated securities), take the deduction right away, and recommend grants over time.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

The biggest DAFs are Fidelity Charitable, DAFgiving360 (formerly Schwab Charitable) and Vanguard Charitable.

According to Ted Hart, author of The DAF Revolution, here are the reasons people use DAFs:

• Flexible and strategic. Contribute now, give later and time tax deductions to high-income years.
• Simple, One contribution can support many charities; the sponsor handles verification and paperwork.
• Accessible. Many DAFs have low or no minimums, opening the door to mass-affluent donors.
• Family-friendly. A natural tool for teaching kids and grandkids about giving and values.
• Powerful tax benefits. Immediate deduction plus tax-free growth inside the account.

Who uses DAFs?

With roughly 1.5 million to 2 million accounts in the U.S., DAFs are thriving across:

• Middle-income households
• Mass-affluent families
• Workplace-giving participants
• Corporate teams
• Community and faith-based donors

David Johnston, CFP®, partner and wealth management adviser at One Point BFG Wealth Partners, and based in Flemington, New Jersey, has seen DAFs reshape how families engage with philanthropy.

"DAFs are a very powerful tool for those who want the tax deduction today but also want to control the assets over time," he says. "Some of our clients involve their family in deciding where donations go. It's a great way to teach the values of philanthropy."

Five reasons to donate stock instead of cash

1. Bigger impact, same gift. Your charity receives the full market value — not an after-tax amount.

2. Eliminate capital gains tax. Avoid taxes on appreciated assets you donate directly.

3. Increase your tax deduction. Claim the full fair-market value of the stock or fund.

4. Keep your portfolio healthy. Reduce concentrated positions without triggering taxes.

5. Pair with a DAF for maximum flexibility. Fund your DAF with appreciated shares and give over time — on your schedule.

Why this matters now

The holidays are busy. Between decorating the tree, hosting family, shopping and trying to figure out why last year's wreath looks slightly more lopsided this season, charitable giving can feel rushed.

But a little planning — especially around appreciated assets and DAFs — can turn your holiday generosity into a smarter, more meaningful gift.

The bottom line

Giving generously is part of who we are. But giving smarter helps you support more causes, involve your family in meaningful conversations and reduce your long-term tax burden.

As a retirement coach at RetireMentors, I help clients understand the meaning of money in their lives — and for many retirees, that includes finding the right nonprofits to support, volunteer with, and champion.

Just because you're retired doesn't mean you want to stop giving. Many retirees find themselves wanting to give more, to deepen their impact and to make philanthropy part of their legacy.

With a few simple strategies — such as donating appreciated securities and using a DAF — you can do exactly that.

Related Content

• How the One Big Beautiful Bill Will Change Charitable Giving
• Developing a Charitable Giving Strategy: Where to Begin
• Seven Moves for High-Net-Worth People to Make Before End of 2025, From a Financial Planner
• How Baby Boomers and Gen Xers Are Redefining Retirement Living
• I'm a Retirement Coach: Eight Surprising Signs You're Ready to Retire

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Missteps here, from miscalculating a holding period to violating the Wash Sale Rule, can lead to unnecessary taxes or penalties.

Can you confidently navigate the rules governing capital gains taxes, and do you know which capital gains tax rate applies to your investments?

Take our quiz to identify knowledge gaps and ensure you are optimizing your portfolio and keeping more of your profits!

Read More About Capital Gains Taxes

• Capital Gains Tax Rates for 2025 and 2026
• Understanding Capital Gains Taxes: An Essential Guide
• How Collectibles Are Taxed
• Capital Gains Tax Exclusion for Homeowners: What to Know

However, Texas voters made a move of their own, approving Proposition 2. That amendment to their state constitution will solidify a ban on Texas capital gains taxes, including those on unrealized gains.

But wait: isn’t Texas already a state with no income tax? Why would voters need to prevent a tax on capital gains that has never been imposed? As you might expect, answers to these questions involve economic and political considerations.

So, here’s more of what you need to know, including what the Texas move could mean for other states.

Texas capital gains tax ban

The passage of Proposition 2 aligns with the Lone Star State's longstanding policy of not imposing a personal income tax (including capital gains taxes). However, once certified, the amendment will reinforce that by constitutionally prohibiting future taxes on capital gains, whether realized or unrealized.

Key Points:

• At first glance, the idea of banning capital gains taxes in Texas may seem unnecessary. (The state has never implemented taxes on capital gains, primarily because it does not have a personal income tax.)
• However, given the changing policies in other states without income taxes, along with proposals for a "wealth tax" discussed during the Biden administration, there are some floating concerns about potential future taxation of unrealized capital gains.
• Since no U.S. state or the federal government has yet introduced an unrealized gains tax, some view the actions being taken in Texas as symbolic and preemptive.

According to reports of unofficial numbers, approximately 65% (just under 2 million Texans) voted in favor of the ban, while 35% voted “no.”

Future plans to tax unrealized gains?

An unrealized gain occurs when the value of an asset you own increases, but you haven't sold the asset yet. So, the gains are what some refer to as “paper gains” since they haven’t been realized tangibly.

• Generally, only realized gains are taxed in the U.S. Some argue that this allows the already ultra-wealthy to accumulate more wealth while avoiding paying their “fair share” of taxes.
• (For instance, billionaires can typically avoid income taxes by living off loans secured by appreciated assets rather than selling those assets, which would trigger capital gains taxes.)

The Biden administration had proposed a 25% tax on unrealized gains for ultra-wealthy individuals holding $100 million or more in assets. Biden also floated taxing unrealized gains at death for gains exceeding $5 million for single filers and $10 million per married couple.

At the time, those ideas ignited political and policy debate about everything from practicality and fairness to economic impact. However, the most important thing to know now is that under current U.S. tax law, investors are generally taxed only on realized gains.

Still, the idea (or fear of the concept) has lingered in some state tax policy debates.

Washington capital gains tax controversy

Interestingly, Washington state also has no personal income tax, but it has had a controversial capital gains tax for the last few years.

• Washington’s capital gains tax initially imposed a 7% tax on long-term capital gains above an annual exemption ($270,000 for 2024, with inflation adjustments).
• The tax applies to profits from the sale of stocks, bonds, and other non-retirement assets, while exempting real estate, retirement accounts, and many small business sales.
• Now, under recent state legislation, a new 2.9% surcharge applies to net long-term capital gains exceeding $1 million above the exemption, effective retroactively from January 1, 2025.

Washington’s approach contrasts with the Texas constitutional ban, highlighting the different strategies states are adopting to fund public services and manage tax policy.

For example, during the 2024 election, Initiative 2109, a measure to repeal the capital gains tax, appeared on the Washington state ballot. But as Kiplinger reported, voters there rejected the repeal effort, with over 63% voting “no.”

The state uses the capital gains tax revenue to fund education (K-12 and early learning) and child care programs. According to Washington’s Department of Revenue, the levy has raised over $1 billion for education and school construction in its first three years

Missouri capital gains tax eliminated

On the other side, Missouri recently became the first state with an individual income tax to ban capital gains taxes.

As Kiplinger reported, on July 10, 2025, Missouri Gov. Mike Kehoe signed House Bill 594 into law. That legislation eliminates the state tax on capital gains for individuals, effective January 1, 2025.

In a statement regarding the bill’s passage, the governor described the tax changes as pro-growth — “keeping more money in the hands of Missouri families and less in government coffers.”

The measure is projected to cost Missouri around $350 million a year.

And speaking of revenue, while Texas voters favored locking in tax protections, some critics argued that bans like Proposition 2 could ultimately limit revenue streams essential for public services, including schools, infrastructure, and health care. There were also concerns that the measure could limit legislative flexibility in the future.

Supporters contend that low and predictable taxes foster economic growth, attract businesses, and encourage investment.

Worth noting: The Washington state capital gains tax sparked warnings of “wealth flight.” Some critics worried that high-income individuals and entrepreneurs would leave in favor of states with lower or no capital gains taxes.

However, data so far seems to tell a different story.

• In its first year, the Washington cap gains tax reportedly generated approximately $840 million — well above projections.
• A subsequent drop the next year, to about $418 million, was attributed to market volatility, rather than a mass exodus of wealthy residents, according to the state’s Department of Revenue.

Federal capital gains tax rates

For now, the fact is that at the federal level, the capital gains tax framework hasn’t changed since President Donald Trump’s second term began. His administration has essentially maintained lower rates from previous administrations without pursuing unrealized gains taxes.

• For 2025 (returns you’ll file early next year) and 2026 (returns typically filed in early 2027), the long-term capital gains tax rates remain at 0%, 15%, and 20%, but the income thresholds have shifted.
• Note: Remember that short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, different from those for long-term capital gains.

For taxpayers and investors, the Texas amendment may reinforce the state’s reputation as a low-tax state. Although even low-tax states have their pros and cons.

For other states, moves like those in Texas and Missouri (or even Washington) could serve as reference points as they decide whether to consider new taxes or strengthen protections against them. Stay tuned.

Read More

• IRS Updates Capital Gains Tax Thresholds for 2026
• Texas Property Tax Relief: What to Know Now
• States With Low and No Capital Gains Tax in 2025

If you have investment income, these updated capital gains brackets (effective for tax returns you’ll file in early 2027) could impact your tax bill.

So, let’s dive into the latest IRS numbers for 2026 and what they mean for you.

New 2026 capital gains tax thresholds

For 2026 (returns normally filed in early 2027), the long-term capital gains tax rates remain at 0%, 15%, and 20%, but the income thresholds have shifted.

Remember that short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, different from those for long-term capital gains.

For more information on capital gains rates, see Capital Gains Tax Rates for 2025 and 2026.

The new brackets are as follows:

0% Rate

Single filers: Up to $49,450

Married filing jointly: Up to $98,900

Married filing separately: Up to $49,450

Head of household: Up to $66,200

15% Rate

Single filers: $49,451 to $545,500

Married filing jointly: $98,901 to $613,700

Married filing separately: $49,451 to $306,850

Head of household: $66,201 to $579,600

20% Rate

Single filers: Over $545,500

Married filing jointly: Over $613,700

Married filing separately: Over $306,850

Head of household: Over $579,600

What's Changed

2026 vs. 2025 capital gains thresholds

Compared to 2025, these new numbers reflect a modest inflation adjustment across all brackets and filing statuses. The changes are designed to provide some relief against "bracket creep." (That's when inflation essentially pushes you into a higher tax bracket.)

For instance, the 0% rate threshold for married couples filing jointly increases from $96,700 in 2025 to $98,900 in 2026. That means an additional $2,200 in income can be taxed at the 0% rate in 2026 rather than at higher rates.

Similarly, the 20% rate threshold increases by over $13,600 for married couples filing jointly (from $600,050 in 2025 to $613,700 in 2026). that potentially enables more income to be taxed at the lower 15% capital gains rate in 2026.

How to benefit from the 0% capital gains rate

The new 0% capital gains rate threshold for 2026 creates some opportunities for investors.

• For example, if your income varies yearly, you might consider realizing long-term capital gains in years when your total taxable income is below the 0% threshold.
• That way, you could take advantage of the lower tax rate.
• Also, depending on your situation, offsetting your capital gains with any losses you may have incurred (tax loss harvesting) could help.

Whatever you do, evaluate all your projected income sources each year, not just capital gains.

Long-term capital gains tax: Bottom line

As Kiplinger has reported, these capital gains tax income threshold adjustments come alongside annual inflation-adjusted changes to the 2026 federal income tax brackets, the standard deduction for 2026 (which increases to $16,100 for individual filers and $32,200 for married filing jointly), and several other key tax provisions.

The various shifts offer several advantages, including having more income taxed at lower rates, providing a buffer against inflation, and allowing for additional tax planning opportunities in some cases.

But don’t forget state taxes on capital gains, which can impact overall tax liability.

And as always, consult a qualified and trusted tax professional to help manage your capital gains tax liability.

Read More

• New Tax Rules: Types of Income the IRS Won't Touch
• Another State Eliminates Capital Gains Tax in 2025: What's Next?
• States With Low and No Capital Gains Taxes
• New 2026 Tax Brackets Are Set

The problem: if you sell, the tax bill on decades of appreciation could be massive. If you stay, you may forgo downsizing, relocating, or unlocking substantial home equity to fund retirement.

Part of the dilemma stems from the federal capital gains exclusion on primary home sales.

Under IRS rules, homeowners can generally exclude $250,000 in profit from federal tax if they are single, or $500,000 if they are married and filing jointly, which is a relatively generous tax break. However, those limits haven’t been updated since they were established in 1997. In that time, home prices in many affluent markets have tripled or more.

As a result, an increasing number of retirees are being hit with capital gains tax bills when they sell their homes. But some lawmakers in Congress want to change that. Here's more to know.

An outdated cap in a changed housing market

If the home sale tax exclusion had kept pace with inflation, today’s caps would be roughly $660,000 for individuals and $1.32 million for couples. Instead, fixed thresholds mean that more sellers face long-term capital gains rates of up to 20% every year.

Don’t forget about the 3.8% Net Investment Income Tax (NIIT) for high earners, and in some places, potentially steep state taxes on gains exceeding those caps.

According to the National Association of Realtors (NAR), nearly one-third of U.S. homeowners — about 29 million people — now have gains on their primary residences that exceed the $250,000/$500,000 exclusion. That share is reportedly projected to rise to more than half of all homeowners by 2030.

Additionally, recent data suggest that approximately 44% of U.S. homeowners are 60 or older, which includes many retirees. The tax burden is especially notable in states like California, Massachusetts, and Colorado, and in neighborhoods that have been transformed by strong demand.

Another concern: More long-time owners facing six-figure tax bills fuels a “lock-in” effect. That effect can cause retirees to hold onto properties they might otherwise sell, which in turn limits housing supply and, in some cases, delays life transitions.

Capital gains tax reform on the way?

Enter the No Tax on Home Sales Act, introduced by Rep. Marjorie Taylor Greene (R-Ga.), which would eliminate federal capital gains taxes on the sale of primary residences.

Greene frames the current tax as “an outdated, unfair burden” that punishes families for building equity. If approved, the bill would:

• Eliminate the existing $250,000/$500,000 limits for primary residence gains
• Apply only to primary homes, not vacation/second homes or investment properties, or house flipping transactions

“Families who work hard, build equity, and sell their homes should not be punished with massive tax bills. The capital gains tax on home sales is an outdated, unfair burden — especially in today’s housing market, where values have skyrocketed. My bill fixes that.” Greene stated in a release regarding the proposal.

Supporters, including President Donald Trump, say the bill would stimulate the housing market by encouraging mobility and enhancing retirement flexibility for older adults with significant unrealized gains. Some critics argue that the benefits would disproportionately favor wealthier homeowners and potentially lead to reduced federal revenue.

During a press briefing, Trump told reporters he was “thinking about eliminating the tax on capital gains from houses,” when asked whether he was considering the proposal to stimulate the market.

Another proposal is floating around Congress. The "More Homes on the Market Act" was reintroduced by Rep. Jimmy Panetta (D-Calif.) in February 2025 with a group of bipartisan cosponsors.

• The act's primary goal would be to double the capital gains exclusion on the sale of a primary residence, increasing it to $500,000 for individuals and $1 million for married couples.
• Supporters argue an update is long overdue, since the current exemption levels were set in 1997 and haven't kept pace with soaring home values.

A rationale behind this bill is that reducing the tax penalty for selling may prompt more homeowners to list their properties.

"Due to outdated limitations on home sale gain exclusions, homeowners who are looking to downsize are discouraged from selling their homes, which can stifle our real estate market and contribute to a lack of housing supply," Rep. Panetta stated in a release regarding the bill.

"Increasing this exclusion through the bipartisan More Homes on the Market Act will make it easier for homeowners to earn more from their investment, which will incentivize them to sell and increase the amount of homes on the market,” he added.

Whether these or other related measures advance in Congress remains to be seen. However, the proposals underscore the importance of homeowners acting strategically under current tax rules.

Home sale gain exclusion: Navigating current law

Section 121 of the Internal Revenue Code generally allows a federal tax exclusion if you’ve owned and lived in the home for at least two of the last five years and haven’t claimed it on another sale within that period. Anything above the threshold is taxable at normal capital gains tax rates.

So, if you’re above the existing thresholds, here are some strategies to consider:

Document Your Basis. Keep records of significant renovations and improvements. These can increase your cost basis (i.e., the original purchase price plus the cost of significant improvements, but not repairs or maintenance) and lower your taxable gain when you sell.

Time Your Sale. The exclusion can be used once every two years. So, carefully spacing sales could shield more total gains from tax.

Coordinate With Income. Avoid selling in a high‑income year that could push you into a higher federal income tax bracket or trigger Medicare IRMAA surcharges.

Integrate Estate Planning. Hold the property until death, which allows heirs a step‑up in basis to fair market value at the date of death. This can reduce or eliminate taxable capital gains for your loved ones if the property is subsequently sold.

Of course, consult a trusted tax or finance professional to devise an approach that makes sense for your situation.

Read More

• No More Capital Gains Tax on Home Sales Coming Soon?
• Capital Gains Tax Exclusion for Homeowners: What to Know
• 2025 Capital Gains Tax Rates for 2025
• More Homeowners Stuck With Capital Gains Tax Bills

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

For many people, it is. They don't invest their money in the most tax-efficient ways and, as a result, miss out on opportunities to pay a lower tax rate (or no tax at all) on their investment gains.

With better planning, you can keep more money for your own needs and pay less to Uncle Sam. Let's explore three tax mistakes you may be making with your investments and how to avoid them.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

1. Missing qualified dividends in a taxable account

Stocks, bonds, ETFs and every other investment vehicle play an important role in a well-balanced portfolio. People often don't know how their taxable account is invested, especially if they have an income need.

On occasion, though, it turns out the investments are all taxable bonds instead of dividend-paying investments.

Why is that a concern? Dividends generated from U.S. companies are typically taxed as long-term capital gains. At most, someone who earns dividends would pay a tax rate of 20%, but some tax filers pay 0% tax on that income.

However, interest from a taxable bond is taxed as ordinary income. The highest tax rate for ordinary income is 37%. Clearly, that's a significant difference.

If you want to invest in dividend-paying stocks — and there are valid reasons to do so — make sure you benefit from the full advantage of how they are taxed.

2. Failing to make use of tax-loss harvesting

You've probably heard of tax-loss harvesting, but many people don't know how to take advantage of their investments' growth over time.

Tax-loss harvesting is a strategy in which you take advantage of a loss in one investment by using it to offset the gain in another, reducing your overall tax bill for the year.

The problem? In order to use a loss to offset a gain, an investor must hold an investment that has lost value. True tax efficiency includes taking advantage of gains as much as harvesting gains against losses.

It's a good idea to review your investments annually for opportunities to take advantage of tax-loss harvesting.

3. Missing windows of opportunity to make IRA withdrawals

If you have saved for retirement in a traditional IRA, you will pay taxes when you make withdrawals from the account.

But if you plan correctly, you can reduce the amount of taxes you will pay over your lifetime by strategically moving the money to a more tax-efficient or even tax-free account.

Unfortunately, too many people fail to take advantage of such opportunities. When an emergency arises, they are forced to make a large withdrawal all at once, possibly pushing them into a higher tax bracket.

Plan well, though, and the tax work is already done if such an emergency comes up.

One of the more popular strategies is to convert money from your traditional IRA or 401(k) into a Roth IRA. With Roth IRAs, your money grows tax-free, and it isn't taxed when you withdraw it.

You will pay taxes when you move the money from your tax-deferred account, so you may want to do the conversion of smaller amounts over several years.

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But you can also move the money into other taxable accounts as well, such as brokerage accounts, CDs, money market accounts or savings accounts.

I once had a client whose goal was to buy a boat four years after he retired, using money from his IRA. Instead of waiting for four years and making one huge withdrawal, he took out smaller amounts each year for four years, putting the money into a taxable account and taking advantage of the capital gains tax.

When the time arrived to withdraw money to purchase the boat, the taxes he had paid were lower than if he had withdrawn a lump sum from the IRA.

Final thoughts

As you can see from these three examples, there's a lot to consider with the tax implications of your investments. Finding the right solutions and avoiding the wrong ones can be complicated.

That's why it's always a good idea to consult with a financial professional who understands the complexities and can help you make decisions that work best for you.

Then, when tax time arrives, you'll have a better handle on how to avoid costly mistakes, allowing you to hold on to more of your money when it comes time to pay the federal government its share.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Way Street Financial, LLC is an Ohio registered investment adviser. Information presented is for educational purposes only and intended for a broad audience. Examples provided are illustrative only, not tailored to any individual's circumstances, and should not be relied upon as personalized investment advice. For specific recommendations based on your goals, please contact a registered investment adviser. Investments involve risk, including possible loss of principal, and are not guaranteed. Way Street Financial, LLC believes this material does not contain any false or misleading statements or omissions and that the content as a whole does not create a misleading impression of the adviser's services. Information is presented in a fair and balanced manner. Way Street Financial, LLC does not provide tax, legal, or accounting advice, and you should consult your own qualified professional regarding your specific situation.

Related Content

• Retirees: Want to Keep Your Money? Make a Tax Plan
• Here's How Retirement Changes Your Taxes
• Five Tax Strategies to Preserve Your Retirement Savings
• Five Things to Consider Before Rolling Your 401(k) into a Roth IRA
• I'm a Financial Professional: This Is the Roth Conversion Mistake Too Many People Make

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

That's the risk many high-net-worth individuals face, especially first-generation wealth builders and corporate executives.

Whether the stock comes from compensation, an inheritance or company loyalty, holding too much of one position can put your financial future at risk.

Concentrated positions, in which a single holding makes up a large portion of your portfolio, often go unnoticed until it's too late.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Market volatility and complex tax rules can make it difficult to unwind these positions without triggering a significant capital gains bill.

Before you face an unexpected tax hit, here's how to tell if you're too concentrated and what you can do to reduce your risk.

The real risk of overconcentration

When one stock makes up more than 20% to 25% of your total investment portfolio, you're in potentially dangerous territory. Even if the stock performed well in the past, overexposure could subject you to greater risk than you're willing to tolerate.

When focusing your investment on one specific company, you not only face potential risk associated with the broader market, but you also face company-specific risks.

A dip in market value due to company-specific issues, such as a management scandal or regulatory shift, can hit your portfolio hard.

If you work at the company, the risk doubles. A single event could cause job loss and portfolio decline, straining cash flow and savings.

There's also a behavioral dimension. Loyalty and pride in a winning stock can make it hard to let go. That emotional attachment can cloud judgment, especially when the tax implications of selling are misunderstood or ignored.

Why selling isn't so simple

The biggest hurdle to diversifying a concentrated position is the capital gains tax.

If you're sitting on years of growth, selling even part of your holding could trigger a significant tax bill. This could push you into a higher bracket and impact your Social Security, Medicare premiums or eligibility for certain deductions.

Unfortunately, many investors don't factor in the ripple effects. Running tax projections and modeling different sale scenarios in advance can help reveal the full impact and inform a more strategic, phased approach to diversification.

Four powerful ways to diversify without getting crushed by taxes

You don't have to sell everything at once or go it alone. These four underutilized strategies can help reduce exposure to a single stock while managing tax liabilities.

1. Exchange funds

These private investment vehicles let you swap your concentrated stock for shares in a diversified pool of equities without triggering immediate capital gains.

Exchange funds often have a holding period, typically seven years, and are only available to accredited investors, usually those with $5 million or more in investable assets.

They are best for investors who want diversification but don't need access to their funds right away.

2. Charitable remainder trusts (CRTs)

If philanthropy is important to you, a CRT can be an effective tool.

• You donate your appreciated stock to a charitable trust
• The trust sells the stock tax-free and reinvests the proceeds
• You receive an income stream for life or for a set number of years
• The remainder goes to charity at the conclusion of that time period

This option provides a path to immediate diversification, a charitable tax deduction and ongoing income.

However, it's irrevocable. Once the stock is donated, you can't change your mind or access the full principal later. It's also not ideal for those who want to leave the assets to heirs.

3. Direct indexing

Direct indexing allows you to mimic the performance of a broad index, such as the S&P 500, by purchasing the individual securities within it. You keep your concentrated stock and surround it with other holdings that create a more balanced, tax-aware portfolio.

You can also harvest capital losses from underperforming stocks to offset gains as you gradually reduce your exposure. It's a flexible and efficient way to move toward diversification without triggering unnecessary taxes.

4. Donor-advised funds (DAFs)

If you already donate to charity, a donor-advised fund (DAF) can be a smart tool. You contribute appreciated stock, receive a deduction based on the fair market value and avoid capital gains tax on the donated shares. From there, you can recommend grants to your favorite nonprofits over time.

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DAFs are particularly useful if you want to front-load several years of charitable giving while reducing your exposure to a concentrated stock position.

This approach also frees up future cash flow, which can then be used to further diversify your portfolio.

A real-world example

A retired pharmaceutical executive came to us holding a large amount of company stock. It had served them well, but they were entering retirement with too much of their future tied to one company.

We started by using direct indexing to build a more balanced portfolio around the concentrated position.

To support their charitable goals, we also helped them contribute five years' worth of donations to a donor-advised fund using appreciated shares, securing a significant tax deduction and further reducing exposure.

Finally, we set a capital gains "budget" to gradually sell off the remaining stock each year without triggering a major tax bill.

The result was a diversified, tax-efficient portfolio aligned with their long-term goals — achieved over time and without unnecessary stress.

Don't wait until it's too late

Holding a concentrated stock might feel like a point of pride, especially if it helped build your wealth. But in retirement or during periods of market stress, it can quickly become a liability.

The longer you wait to act, the fewer options you might have. It also becomes harder to unwind the position without triggering costly tax consequences.

Too often, investors wait until something goes wrong. But with a proactive approach, you can diversify gradually, preserve more of your gains and protect your long-term goals.

If any one stock makes up more than 20% of your portfolio, it's time to take a closer look. Then work with a qualified adviser who can help you evaluate your options, coordinate with your tax professional or estate attorney and build a customized plan.

You don't need to sell everything at once, but you do need a clear strategy for when to sell, how to sell and how much to sell.

Taking action now gives you more flexibility, more control and a better chance of protecting what you've worked so hard to build.

Related Content

• Managing a Concentrated Stock Position: Too Much of a Good Thing
• For a Concentrated Stock Position, Ask Your Adviser This
• I'm 58 and Just Sold Some Stock to Lock in Gains. I Made a Killing, But I'll Have a Big Tax Bill. What's My Next Move?
• Another State Eliminates Capital Gains Tax in 2025: What's Next?
• Why Understanding Capital Gains Taxes Is Critical When Selling Investments

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

IMPORTANT MEMORANDUM

TO: All 1031 exchange, 721 exchange UPREIT and Delaware statutory trust investors
FROM: Dwight Kay, founder and CEO of Kay Properties & Investments
SUBJECT: Risks of forced DST-UPREIT conversions

EXECUTIVE SUMMARY

In recent Delaware statutory trust (DST) offerings, some sponsors include forced Section 721 UPREIT conversions into perpetual-life REITs (non-traded REITs) at the end of the DST's hold period.

Under this structure, investors receive potentially illiquid REIT (real estate investment trust) operating partnership (OP) units instead of cash.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

This memo outlines the key risks of forced UPREITs (umbrella partnership REITs) and explains why investors should prioritize traditional DSTs or DSTs with fully optional 721 UPREIT elections.

Here are four key risks of forced DST 721 UPREIT conversions:

1. Loss of control over exit

In a forced DST 721 UPREIT scenario, investors have no choice in the exit strategy — you must exchange your DST interests for REIT operating partnership units on the sponsor's terms​.

The timing and terms might not align with your personal financial strategy, and you effectively lose flexibility to choose whether or when to cash out or continue deferring taxes.

Investors are essentially locked in to the UPREIT without the ability to change course or pursue a different 1031 exchange at sale​.

Investors who participate in a forced 721 UPREIT put themselves into a situation in which they won't be able to evaluate the health of the final-destination REIT at the time of the 721 transaction.

This is problematic because the final-destination REIT might appear healthy at the time of the DST transaction, but when the DST is called into the 721 exchange transaction in a few years, the final-destination REIT could potentially have a completely different financial picture and risk profile.

2. Limited liquidity and redemption risks

Non-traded, perpetual-life REITs resulting from a 721 UPREIT conversion offer very limited liquidity compared with a straightforward property sale. The partnership units you receive are illiquid — they're not publicly traded and can't be quickly converted into cash.

While many non-traded REITs offer periodic redemption programs, those programs are typically restricted and not guaranteed as per the REIT's offering documents. Such share redemption plans can be capped, oversubscribed, even suspended, especially in times of market stress​.

Regulators often caution investors that non-traded REITs often involve a lack of liquidity and sometimes include uncertain early redemption provisions for investors.

In a forced UPREIT, this means you could be unable to liquidate your investment on your own timetable. Even worse, if many investors seek to redeem, the REIT might simply halt redemptions, as has occurred with some large perpetual-life REITs.

You give up the assured liquidity of a sale, and your ability to cash out depends on the REIT's limited redemption policies (which the REIT can alter or pause at its discretion).

Many of the largest non-traded perpetual-life REITs have gated their liquidity provisions. Investors who might have been told they would have access to liquidity by their financial adviser can be stuck with an illiquid real estate offering. It could take them months or years to access liquidity.

3. Valuation opacity

A perpetual-life DST-sponsored REIT often uses internally assessed net asset values (NAVs) for its shares, which introduces valuation opacity.

Since there is no active market setting a transparent price, investors must rely on sponsor-provided and commissioned appraisals or NAV calculations, which can lack the transparency of open market pricing​.

In a forced conversion, you surrender a straightforward payout (sale proceeds at market value) for an opaque stake in a larger portfolio.

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Determining what your new REIT units are truly worth can be difficult, and the valuation can be subject to conflicts of interest, as the sponsor is on both sides of the DST-to-REIT transaction. This opacity can obscure whether you're getting fair value for your DST property.

In contrast, a direct property sale to an unaffiliated third party establishes a clear market value for your investment.

4. Tax deferral risks

While a 721 UPREIT conversion itself is generally not a taxable event, it can introduce complex tax risks down the line.

Once you hold REIT operating partnership (OP) units, you can no longer do a 1031 exchange on that investment, as OP units don't qualify as like-kind property for 1031 purposes.

This means a forced UPREIT effectively cuts off your ability to continue deferring capital gains tax via future 1031 exchanges.

As a result, your tax deferral will end when you eventually liquidate your REIT units. Any conversion of your OP units into REIT shares or cash redemption is a taxable event that will trigger the capital gains you had deferred​.

In other words, the tax bill is delayed but not eliminated, and you'll encounter it again when exiting the REIT. You'll also lose control of the timing of that taxable event.

If the REIT later forces a merger or compels conversion of your OP units to common shares, you could be hit with a poorly timed taxable capital gain.

There is also the risk that the REIT's operating partnership might sell the underlying property you contributed, and without careful structuring or tax protection agreements, such a sale could unexpectedly trigger taxable gains to you as an OP unit holder​.

In summary, a forced UPREIT can create an inevitable tax liability and take away the 1031 exit ramp that DST investors often rely on to continually defer taxes.

Many DST 721 UPREIT sponsors clearly state in their offering documents that they won't provide a tax protection agreement to their investors.

This would leave the investors exposed. If the REIT were to sell its DST property that the DST investors contributed via a 721 exchange to the REIT, it would be forced to pay capital gains taxes on that contributed property.

In part two of this series, I will discuss the flip side of these forced conversions and describe why I firmly believe fully optional UPREIT conversions are far superior and what investors should be aware of before investing in any 721 UPREIT exchange.

Related Content

• 721 UPREIT DSTs: Real Estate Investing Expert Explores the Hidden Risks
• How to Use DSTs and 1031 Exchanges for Diversification
• Considering a 721 Exchange? Adopt a Buyer Beware Mindset
• DST Exit Strategies: An Expert Guide to What Happens When the Trust Sells
• Six Risks of Delaware Statutory Trusts in 1031 Exchanges

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But one state has changed its tax policy to help its residents keep more of their hard-earned profits.

On July 10, 2025, Missouri Gov. Mike Kehoe signed House Bill 594 into law. The legislation eliminates the state tax on capital gains for individuals as of January 1, 2025.

In a statement regarding the bill’s passage, the governor described the tax changes as pro-growth — “keeping more money in the hands of Missouri families and less in government coffers.”

The change, projected to cost around $350 million a year, makes Missouri the first U.S. state with an individual income tax to eliminate capital gains taxes for individuals. But will other states follow?

New capital gains tax exemption in Missouri

• Beginning with the 2025 tax year, Missouri residents won’t pay state income tax on capital gains from stocks, bonds, real estate, and other assets, regardless of the holding period.
• Taxpayers can deduct 100% of the capital gains they report federally from their Missouri taxable income.
• The exemption broadly applies to gains from the sale of a home, farmland, business ownership transfers, and investment portfolios.

The capital gains tax change is part of a broader state tax reform package.

Other elements include expanded property tax credits for older adults and new sales tax exemptions on essential products like diapers and feminine hygiene items.

The legislation also contains provisions for corporate taxpayers. If Missouri’s top individual income tax rate falls to 4.5% or below, corporations will be eligible to deduct 100% of their federally reported capital gains from Missouri taxable income beginning the following tax year.

Some policy analysts argue that the policy raises questions about tax equity. That’s because the primary beneficiaries of capital gains exemptions tend to be wealthier households with substantial investment incomes.

However, supporters say the capital gains tax policy will make Missouri more competitive by encouraging capital retention and potentially attracting high-net-worth individuals.

What about the federal capital gains tax rate?

It is important to note that Missouri’s capital gains exemption applies only at the state level and does not affect federal tax obligations.

Capital gains taxes are levied on profits from the sale of assets like stocks, mutual funds, and real estate. The rate at which those gains are taxed depends on your taxable income and how long you've held the asset. But keep in mind that capital gains tax rates are generally lower than the tax rates for ordinary income like wages.

• Federal capital gains tax rates haven’t changed for 2025. Those range from 0% to 20% depending on income.
• This means taxpayers in Missouri will continue to comply with federal requirements.

Interestingly, there has been some chatter about a new proposal to eliminate the federal capital gains tax on home sales.

Under current federal tax rules, eligible homeowners can exclude up to $250,000 (or $500,000 for married couples) in gains when selling a primary residence. Amounts above those exclusion limits are generally taxed at normal capital gains rates.

However, in recent years, more people across the United States have triggered capital gains taxes when selling their primary homes, since the home sale exclusion limits have remained unchanged since 1997, despite soaring home values in many areas.

Rep. Marjorie Taylor Greene (R-Ga.) has introduced the No Tax on Home Sales Act, which, if eventually passed and signed into law, would generally eliminate capital gains taxes on home sales.

For more information, see: No Capital Gains Tax on Home Sales Coming Soon?

States with no capital gains tax: Will more follow?

Missouri’s move to eliminate the state capital gains tax could catch the attention of other states considering how to tax investment income.

Currently, several states have no capital gains tax because they don’t have a state income tax at all. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.

However, not all states are moving toward eliminating capital gains taxes.

For example, as Kiplinger has reported, Washington state, which does not have a traditional income tax, recently imposed a capital gains tax on high earners.

The takeaway? Stay tuned. As Missouri’s new policy takes effect, its impact on the state’s economy and budget could provide a model for others.

Related

• Federal Capital Gains Tax Rates for 2025
• More Homeowners Face Capital Gains Tax Bills
• Missouri Tax Guide 2025
• Washington Approves Capital Gains Tax Increase: Who Pays?

Why? Those exclusion limits haven’t changed since 1997, despite soaring home values in many areas.

Now, Rep. Marjorie Taylor Greene (R-Ga.) has introduced the No Tax on Home Sales Act. The goal of the bill is to eliminate capital gains taxes on home sales of primary residences.

“Families who work hard, build equity, and sell their homes should not be punished with massive tax bills. The capital gains tax on home sales is an outdated, unfair burden — especially in today’s housing market, where values have skyrocketed. My bill fixes that.” Greene stated in a release regarding the proposal.

President Donald Trump has also weighed in.

During a press briefing, Trump told reporters he is “thinking about eliminating the tax on capital gains from houses,” when asked whether he was considering the proposal to stimulate the market.

But as you might expect, the bill is already sparking debate about who benefits and whether such a significant change could even pass Congress.

So, will there soon be “no capital gains tax on home sales”? Here’s what you need to know.

No tax on home sale profit?

Under current tax rules, eligible homeowners can exclude up to $250,000 (or $500,000 for married couples) in gains when selling a primary residence. Amounts above the exclusion limits are generally taxed at normal capital gains rates.

So, if you sell your home for a gain of less than those amounts, you can avoid paying capital gains tax on that amount.

(There are, of course, some criteria to meet and some IRS exceptions, but for many homeowners, the home sale exclusion helps them avoid capital gains taxes.)

For more information, see The Capital Gains Tax Exclusion for Homeowners.

However, as mentioned, the exclusion limits haven’t been adjusted for inflation. So, the value of the tax relief provided by the exclusion has eroded over time.

(Some estimates suggest that if the $250,000/$500,000 home sale exclusion had been indexed to national home price growth since 1997, it would be about $618,000/$1.24 million today.)

Combine that with soaring home values for some, and you end up with more homeowners unexpectedly facing capital gains tax liability when selling their properties.

Enter the GOP’s Rep. Marjorie Taylor Greene’s No Tax on Home Sales Act. If approved, the bill would:

• Eliminate Capital Gains Tax Limits: The bill proposes removing the current dollar limits on the federal capital gains tax exclusion for the sale of a primary residence.
• Focus on Primary Residences: The measure would apply only to primary homes. According to the bill, the capital gains exemption would not extend to second homes, investment properties, or house flipping transactions.
• Not Be Retroactive. If enacted, the changes would take effect for sales and exchanges occurring after the law’s passage.

‘Lock-in Effect’ and capital gains tax on the sale of a house

Part of Rep. Greene’s argument is that eliminating capital gains taxes could remove a key deterrent to selling, particularly for long-term and “senior” homeowners.

• Older adults and long-term homeowners often choose not to sell their homes because they represent a source of financial stability.
• Particularly for those who have paid off their mortgages, selling often means facing higher costs elsewhere due to today's elevated mortgage rates.
• Additionally, in many cases, their homes hold substantial equity, which they may want to preserve as an emergency resource, through reverse mortgages, or to pass on to loved ones.

The rationale behind the housing supply argument is that while high mortgage rates and home prices are often key reasons people stay in their homes, capital gains taxes can also make selling less appealing.

Some policymakers argue that removing or raising the tax exclusion limits could make moving more affordable for some homeowners and boost housing turnover. (Data indicate that the existing supply of single-family homes remains relatively tight.)

However, as reported by CNBC, others point out that eliminating capital gains taxes on home sales wouldn’t address factors like costly new mortgages and high home prices, which, as mentioned, contribute to the strong reluctance of some homeowners to sell (also known as the “lock-in effect”).

Some critics also point to potential negative impacts of the proposal, like hundreds of billions in reduced federal tax revenue, and argue that the measure would primarily help wealthier households.

Who benefits from no home sale tax?

According to research from the Yale Budget Lab, based on 2022 Federal Reserve data and estimates from the National Association of Realtors, only about 10 to 15 percent of homeowners have capital gains on their primary residences that exceed the current federal tax exclusion limits.

The report found that homeowners benefiting from the elimination of capital gains taxes on home sales are typically wealthier and older, with homes averaging $1.4 million and capital gains above the exemption at around $430,000.

Under Greene’s proposal, that relatively small, but affluent group could reportedly save approximately $100,000, assuming the top capital gains rate.

• Overall, homeowners most likely to benefit from a repeal of capital gains taxes on home sales are those who’ve seen significant growth in property value.
• According to housing market data, longtime residents in cities such as San Francisco, California; Austin, Texas; and Miami, Florida, often experience hundreds of thousands of dollars in property appreciation.

So, fully eliminating that tax could mean six-figure savings for people whose homes have risen far beyond the normal $250K/$500K exclusion limits.

Who misses out?

On the flip side, plenty of homeowners wouldn’t see much of a change.

According to IRS tax return and other market data, many people selling their homes already fall under the $250,000/$500,000 exclusion. So, they wouldn’t owe capital gains tax under current law.

Recent buyers or those in slower-growth markets might also walk away from a home sale with little or no appreciation, which could make the proposed tax change largely irrelevant.

Worth noting: renters — who now make up over a third of U.S. households — wouldn't benefit.

Additionally, homeowners in states with high capital gains tax rates, like California or New York, may still face substantial tax bills when they sell their primary residences.

Capital gains tax rate: Bottom line

President Trump’s latest float, to support a proposal to eliminate capital gains taxes on home sales, is making headlines. However, whether Congress will act on the idea remains a question mark.

For now, eligible homeowners can take advantage of the home sale exclusion. Up to $250,000 ($500,000 for married couples) in profit from selling your primary home can be excluded from federal capital gains tax if you meet the IRS rules.

With 2025 capital gains tax rates ranging from 0% to 20% based on income, the long-standing exclusion continues to help many avoid a hefty tax bill. But you never know what can happen in Washington, so stay tuned.

Related

• More Homeowners Face Capital Gains Tax Bills
• New GOP Car Loan Interest Deduction: Which Cars and Buyers Qualify
• Trump’s ‘Big Beautiful Bill’ With Trillions in Tax Cuts
• Capital Gains Tax on Real Estate and Home Sales

The One Big Beautiful Bill, signed into law on July 4 by President Donald Trump, marks a pivotal moment that will reshape how investors approach distressed community investments for decades to come.

This comprehensive legislation transforms the temporary opportunity zones experiment into a permanent fixture of American tax policy.

The implications for investors, communities and the broader economy are profound, creating both unprecedented opportunities and new challenges that demand careful consideration.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

From experiment to institution

The original opportunity zones program emerged from the 2017 Tax Cuts and Jobs Act (TCJA) as a bold experiment in place-based economic development. By offering substantial tax benefits to investors who reinvested capital gains into designated distressed communities, the program aimed to channel private capital toward areas that traditional markets had overlooked.

Now, seven years later, that experiment is graduating to permanent status.

The permanence provision represents perhaps the most significant change in the One Big Beautiful Bill. No longer will investors face the uncertainty of potential program expiration, enabling longer-term planning and more substantial commitments to community development projects.

This stability should prove particularly attractive to institutional investors who have historically been cautious about programs with sunset clauses.

However, permanence comes with important caveats. The current program's structure and benefits will sunset as scheduled on December 31, 2026. What emerges in 2027 will be a more streamlined version of the original concept, with some important changes in the deferral of the initial capital gains.

The new incentive structure

Under this new framework, investors who deploy capital gains into qualified opportunity funds after December 31, 2026, will still enjoy the permanent elimination of capital gains taxes on their opportunity zone investments held for at least 10 years — the program's signature benefit remains intact.

What changes is the treatment of the original deferred gains. The new system offers a rolling five-year deferral period for the initial capital gains invested, replacing the current program's more complex timeline that provided basis step-ups at five and seven years before the final tax elimination benefit.

The legislation introduces a tiered approach to basis step-ups, acknowledging the varying challenges of different investment environments. Standard QOF investors will receive a 10% basis step-up after five years, providing modest tax relief on their original deferred gains.

More significantly, the bill establishes a new category of qualified rural opportunity funds, recognizing that rural areas face unique economic challenges that warrant enhanced incentives.

Rural investors will enjoy a 30% basis step-up, a substantial improvement that reflects the higher risks and longer development timelines typically associated with rural investments.

These areas, defined as locations outside cities or towns of 50,000 people or contiguous urbanized areas, will also benefit from a reduced substantial-improvement threshold of 50% rather than the standard 100% requirement.

The enhanced rural incentives create particularly compelling opportunities in the oil and gas sector, where many projects are naturally located in rural areas that could qualify for qualified rural opportunity fund status.

With energy markets already showing robust fundamentals and the Trump administration's pro-energy policies creating a favorable regulatory environment, the ability to layer substantial tax advantages onto energy investments represents an exciting convergence of market timing and tax strategy.

The 30% basis step-up, combined with the reduced improvement threshold and ultimate tax-free treatment of gains, could make rural energy projects among the most tax-efficient investments available to sophisticated investors seeking both energy sector exposure and community development impact.

Geographic reshuffling

One of the most consequential aspects of the One Big Beautiful Bill involves the periodic redesignation of opportunity zones themselves. Starting July 1, 2026, governors will be required to select new Census tracts every decade, with the first new designations taking effect January 1, 2027.

This rolling approach ensures that the program's benefits remain targeted toward areas of greatest need rather than becoming entrenched in communities that may have already experienced significant improvement.

The redesignation process will operate under tighter criteria than the original program. The "low-income community" threshold will drop from 80% to 70% of area or statewide median family income, a change that will eliminate about 22% of current zones.

Additionally, the exception that allowed non-low-income tracts contiguous to qualified areas will disappear, further concentrating benefits in the most economically distressed locations.

Puerto Rico faces particular challenges under the new framework. The island will lose its blanket designation status and will be limited to selecting only 25% of eligible tracts, the same limitation that applies to all states. This change reflects a broader congressional effort to ensure that opportunity zone benefits are distributed more equitably across all American communities.

Strategic timing considerations

The transition period between the current program and Opportunity Zones 2027 creates a complex strategic landscape for investors. Those who can deploy capital gains before the December 31, 2026, deadline will enjoy the current program's more generous benefits.

However, a timing quirk in the legislation may discourage some 2026 investments. Investors receiving K-1 distributions or other gains late in 2026 might find themselves better served by waiting until 2027 to make their opportunity zone investments, when they can take advantage of the new five-year rolling deferral rather than being locked into the abbreviated timeline of the current program's final year.

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This "dead zone" issue highlights the importance of sophisticated tax planning during the transition period. Investors with significant anticipated gains should work closely with their financial advisers to model various scenarios and optimize their investment timing.

What didn't make the cut

Hey, nothing's perfect ... especially where legislation is concerned.

Despite the bill's comprehensive nature, several provisions sought by opportunity zone advocates failed to make it into the final legislation. The program continues to restrict benefits to capital gains, excluding ordinary income and other forms of investment capital.

This limitation has historically made the program less attractive to certain types of investors and may continue to constrain its overall impact.

Operating businesses with significant tangible property requirements will continue to face challenges in qualifying for opportunity zone benefits. The legislation also maintains the prohibition on fund-of-funds structures, limiting the ability of smaller investors to access diversified opportunity zone portfolios.

Affordable housing advocates will be disappointed by the absence of additional incentives specifically targeted toward residential development. Given the ongoing affordable housing crisis in many American communities, this omission represents a missed opportunity to align opportunity zone investments with critical housing needs.

Looking ahead

The One Big Beautiful Bill represents both an ending and a beginning for opportunity zone investing. The current program's sunset creates urgency for investors seeking to maximize their tax benefits under existing rules, while the new permanent framework offers long-term stability for community development initiatives.

Success in this evolving landscape will require careful attention to the program's new geographic boundaries, incentive structures and reporting requirements. The expanded transparency measures taking effect in 2027 will provide greater visibility into the program's community impact, potentially influencing future policy refinements.

For investors, the key will be balancing the immediate opportunities available under current rules with the long-term potential of the restructured program. Those who can navigate this transition effectively will find themselves well-positioned to participate in what promises to be a new era of tax-advantaged community development investing.

The transformation of opportunity zones from a temporary experiment to a permanent policy tool reflects broader recognition that private capital can play a vital role in addressing America's economic development challenges.

While the program's benefits may be somewhat more modest going forward, and a number of current Census tracts appear destined to lose their OZ designation, the newfound permanence of the program provides the stability necessary for sustained community investment and development.

The coming months will reveal whether investors and communities can effectively harness these new tools to create lasting economic opportunity across America's most distressed areas.

As always, remain in close contact with your financial advisers to navigate these new waters successfully. Now more than ever, you need a team that understands not only the nuances of opportunity zones and the tremendous opportunities they present, but also the ways to minimize the risks inherent in any investment, including this one.

Related Content

• No Social Security Tax Changes in Trump's 'Big Bill'? What Retirees Need to Know
• Social Security Email About Trump Tax Changes Sparks Confusion
• Should You Start a 'Trump Account' for Your Child?
• Most Taxpayers Don't Like What's in Trump's 'Big Beautiful Bill'
• Striking Oil in Opportunity Zones: Now Might Be the Best Time to Invest

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The good news: With smart planning, married couples can legally access up to $126,700 of income each year completely tax-free. Let's explore how this works and offer a step-by-step blueprint for families aiming to retire between ages 55 and 65.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Two key numbers for 2025

To unlock this "zero-tax" strategy, retirees must understand two important thresholds for 2025:

• $30,000: The standard deduction for married couples filing jointly
• $96,700: The top of the 0% federal long-term capital gains bracket

In combination, this allows a couple to receive $126,700 of taxable‐income cash flows — via dividends, interest and capital gains — without owing a dime of federal income tax.

Why taxable accounts matter

Most retirees focus on tax-deferred (401(k), 403(b) and IRA) accounts — but the real engine of the zero-tax strategy is taxable brokerage accounts invested in low-cost, tax-efficient funds. Here's why:

• Dividends and interest from these accounts count as ordinary income
• Long-term capital gains (on investments held at least one year) enjoy a 0% tax rate up to the threshold mentioned above

Over the six to eight years before retirement, consider focusing on the following three steps:

• Max out retirement accounts first, focusing on Roth accounts for an additional source of tax‐free distributions
• Build taxable brokerage accounts, holding primarily low-cost ETFs (for diversification and tax efficiency)
• Hold securities for more than one year, except when harvesting losses strategically

This approach creates maximum flexibility in retirement. By strategically timing withdrawals from Roth, taxable and tax-deferred accounts, investors can fill up the 0% capital gains bracket and standard deduction, effectively zeroing one's federal tax bill each year.

A case study

To illustrate, consider Bob (62) and Mary Jones (62), who retired at the end of 2024. Their balance sheet:

• Checking/savings: $80,000
• Taxable brokerage: $1.4 million
• Roth IRAs: $530,000
• Traditional 401(k) accounts: $2.3 million

They need $120,000 per year (net of federal tax) to cover living expenses. Their Social Security strategy calls for Mary (the lower-earning spouse) to begin benefits at age 67 for $30,000 annually, and Bob to claim at age 70 for $45,000.

In the meantime, they will rely on savings and investments to meet their cash-flow needs.

Here's how Bob and Mary can take $120,000 in 2025 without paying federal income tax:

• $25,000 from Roth IRAs, completely tax-free
• $30,000 in dividends/interest from their taxable and checking accounts: ordinary income, of which they'll use $25,000 for living expenses
• $90,000 in long-term capital gains, realized by selling a portion of their ETFs in the taxable account. Of that $90,000, they will distribute $70,000 as needed for expenses.

The combined taxable income is $30,000 (ordinary) + $90,000 (long-term gains) = $120,000. By staying within the 0% capital gains bracket and the $30,000 standard deduction, Bob and Mary owe zero federal income tax for 2025.

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Meanwhile, their Roth IRAs — invested for growth — should continue earning returns sufficient to preserve principal over time.

Variations on this strategy

Couples with larger portfolios, different account mixes or higher ordinary income can push this framework further.

For instance, filling the 12% ordinary-income bracket (currently $96,950 for married couples), you can augment your cash flow while still keeping overall taxes extremely low. Customized projections can show how much additional capital gains are permissible before triggering a higher tax rate.

The action plan

If you'd like to retire early — or simply reduce your retirement tax bill — consider these guidelines:

• Dollar-cost average into tax-efficient ETFs in a taxable account
• Optimize Roth contributions each year, both within 401(k) plans and IRAs if possible
• Rebalance strategically, harvesting tax losses to offset gains when markets dip is another way to keep your effective capital gains rate at or near zero
• Work with an adviser who offers tax planning or a tax professional who can help you navigate this strategy, taking into account changing tax rules

Most retirees overpay on federal (and state) income taxes simply because they lack a roadmap for taxable withdrawals.

By leveraging the 0% capital gains bracket and the standard deduction, you can legally funnel six figures of yearly cash flow into your pocket — completely tax-free — and stretch your retirement savings much further.

Retirement planning doesn't start at age 65. Whether you're considering semi-retirement at 55 or aiming to walk away from the workplace at 62, the sooner you build your taxable account and map out a withdrawal plan, the more years you'll have to compound wealth with minimal tax friction.

If early retirement is on your horizon, now is the time to review account allocations, fund Roth accounts, and set up a tax-efficient withdrawal strategy.

With the right framework and ongoing tax planning, you might retire years earlier — and enjoy a tax-free income stream that most Americans never even know exists.

Related Content

• Six Tax Breaks That Get Better With Age
• The Rule of 55: One Way to Fund Early Retirement
• Want To Retire at 60? See if You Can Answer These Five Questions
• Before You Retire, Consider These Five Questions
• Got a Cash Balance Pension? Understand Your Options

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tucked within the mega-legislation known as the “One Big Beautiful Bill” (OBBB) is a provision that some tax policy analysts call unprecedented, because it calls for a dollar-for-dollar federal tax credit for donations to private school voucher programs with no budgetary cap.

The legislation reduces the tax incentive for most charitable giving, while nearly tripling the tax incentive available to donors that fund free or reduced private K-12 schools, according to the Institute on Taxation and Economic Policy (ITEP).

Written out of the final version of Trump’s tax bill is a capital gains tax write-off. An earlier version of the partisan legislation allowed donors who contribute appreciated assets, such as corporate stock, to Scholarship Granting Organizations (SGOs) an additional tax benefit: capital gains tax avoidance.

The final version of Trump’s megabill could cost the U.S. as much as $25 billion per year, the National Education Association (NEA) estimates.

Here’s what you need to know about the private school voucher tax break, and what it could mean for your finances.

What is a tax credit voucher?

The private school voucher tax break, designed to reward individuals who make charitable donations to SGOs, is a modified version of the proposed Educational Choice for Children Act.

SGOs are non-profit organizations that distribute donated funds to students via scholarships, often for private school tuition. The awards can be used to pay for tuition, books and homeschooling costs.

How would the voucher tax credits work?

• In exchange for a donation to private K-12 school vouchers, taxpayers will get a dollar-for-dollar tax credit.
• The nonrefundable tax credit will be worth up to $1,700 (rather than 10%) of adjusted gross income as suggested originally.

The concept will promote private school choice by using public funds to help families pay for private school tuition or homeschooling expenses. That includes religious schools, which most voucher students attend.

It’s also referred to as “universal school choice,” a policy that the Trump administration has advocated for. It also aligns with Project 2025, a conservative policy agenda created by the Heritage Foundation.

Some states won’t participate in the school voucher tax break

When it comes to the nation’s first federal school voucher program, Republican lawmakers allowed states and the District of Columbia, to voluntarily elect to participate in the tax break program for the tax calendar year and if so, identify scholarship-granting organizations in the state.

Furthermore, the school voucher nonprofits can only administer school vouchers within their states. Private and religious schools will also be subject to federal regulations.

States won’t be forced to participate, thanks to pushback from such advocacy organizations as the National Education Association (NEA). That means Democratic-majority states such as California and New York can opt out of the school voucher program.

As a note, private school vouchers have appeared on various state ballots 17 times, and voters have rejected all of them, as reported by the NEA. The most recent votes were in Colorado, Kentucky and Nebraska in November of last year.

“There is no cap on how much the federal government will spend on this tax giveaway, and it is now a permanent part of the federal tax code,” wrote the National Education Association following the OBBA’s enactment. “NEA estimates that it will cost at least $25 billion per year.”

Who would qualify for the scholarships?

Under the GOP tax bill, SGOs will distribute donated money via scholarships to households earning at or below 300% of a given area’s median gross income.

It must also be for a qualified elementary or secondary education expense, including (but not limited to):

• Curriculum and curricular materials
• Books
• Fees for nationally standardized testing
• Online educational materials
• Tuition or fees for a private K-12 school and homeschooling expenses

Avoid capital gains tax under Trump's 'big bill'?

As initially drafted, Trump’s "big, beautiful bill" would have distributed $5 billion a year in federal tax credits for private school voucher donors each year. That budgetary cap was written off in the final version of the OBBBA.

Currently, donors to private school voucher programs will receive a dollar-for-dollar tax break equal to $1,700.

What else was eliminated from the final legislation? A lucrative tax shelter for the wealthy. An earlier draft of Trump’s “big beautiful bill” would have allowed private school voucher donors who contribute corporate stock, for example, to avoid capital gains tax.

Overall, the capital gains tax avoidance would have cost the federal government billions, ITEP estimates.

Other cuts to charitable donations

As mentioned, the dollar-for-dollar tax rebate for donors to private school voucher programs provision is “unprecedented at the federal level,” ITEP analysts say, as no other charity has ever received that kind of allowance.

What’s troubling: Trump’s tax bill could cut charitable-giving tax incentives for donors to most nonprofit groups while tripling the incentive to donors that fund private K-12 school vouchers.

• ITEP estimates that donors to children’s hospitals or other charities would receive no more than 35 cents in tax savings for each dollar donated, down from a maximum tax benefit of 37 cents under Trump’s megabill.
• Additionally, the OBBB stands to reduce the average benefit of itemized deductions for charitable giving by more than a quarter.

Some critics of voucher programs argue that public dollars should be used to boost spending in public schools, not to subsidize private education. The private school voucher tax credit could create an indirect way of funding private schools with taxpayer dollars.

The ‘One Big Beautiful Bill’: What’s next

Trump’s self-dubbed One Big Beautiful Bill was enacted into law on July 4, 2025.

The major tax cuts and spending package is slated to add roughly $3 trillion to the debt through the next decade, and nearly $5 trillion as temporary provisions from Trump’s Tax Cuts and Jobs Act (TCJA) were made permanent.

The measure also includes a variety of changes to family tax credits and education credits.

Stay tuned for more information on how the newly enacted OBBB might impact your finances.

Related Content

• Capital Gains Tax Rates 2025: What You Need to Know
• Which Capital Gains Are Taxable and How to Calculate Your Tax
• Homeschoolers Could Soon Save on Expenses With 529 Plans
• Money for Your Kids? Three Key Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's Finances

1. Capital gains tax rates

Reader Question: What are the federal capital gains tax rates for 2025? And what are the income cut-off points for the various rates?

Joy Taylor:
Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are taxed at 0%, 15% or 20%. Prior to 2018, the determination of which rate you'd qualify for was based on your tax bracket. Through the end of 2025, the rate is based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends.
For 2025, the income thresholds are:

• The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
• The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates discussed above, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%. Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates.

2. The 0% tax rate

Reader Question: Can you explain how to qualify for the 0% federal tax rate on long-term capital gains and qualified dividends?

Joy Taylor:
For 2025, if taxable income other than long-term gains and dividends doesn't exceed $48,350 on single-filed returns, $64,750 on head-of-household returns or $96,700 on jointly filed returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These figures are a bit lower for 2024 tax returns, since they are adjusted annually for inflation: $47,025 for single filers, $63,000 for head-of-households, and $94,050 for joint filers. Note that although these 0%-rate gains might not be taxed at the federal level, they do increase adjusted gross income. Also, some states tax capital gains as ordinary income.

Here are three scenarios to illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in taxable income.
In the first scenario, the couple has $77,000 of taxable income.
The full $18,000 of gains and dividends is taxed at the 0% rate.
In the second scenario, the couple has taxable income of $104,000.
$10,700 of the gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate.
In the third scenario, the couple has $120,000 of taxable income.
The 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.

3. Capital gains indexing

Reader Question: Is there any effort in Congress to provide some sort of inflation indexing for capital gains?

Joy Taylor
As you might be aware, the White House and congressional Republicans are negotiating a tax package that would extend the expiring provisions in the 2017 Tax Cuts and Jobs Act and make some other tax changes.

There has been no talk about changing the taxation of capital gains, with one exception. Free-market groups and some Republican lawmakers would like to see capital gains indexed to inflation each year. Essentially, if this concept were enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and the time of sale. For example, say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent indexing, you would have a $25,000 long-term capital gain. With indexing, using the Chained CPI inflation measure, your basis in the stock would jump to $13,740, making your gain $21,260, thus lowering the amount of capital gain tax you would pay.

Senator Ted Cruz (R-TX), a long-time proponent of capital gains indexing, has introduced a bill that would allow inflation indexing for purposes of calculating a capital gain or loss. His proposal would use the gross domestic product deflator as the index for measuring inflation.

It's hard to know right now whether capital gains indexing would make it into the tax package. There are lots of complexities associated with it, including choosing the appropriate index; tax basis doesn’t remain static over time; and indexing would add to the federal debt. And we don't know where President Trump stands on the idea. During his first term as president, he was all over the board. He touted the idea several times, but then also nixed it.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to gifts, tax credits for installing solar panels in a home and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor, May 23, 2025: Gifts, Estate Tax
• Ask the Editor, May 4, 2025: Tax deductions and losses
• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.

Once Gov. Mike Kehoe, who has reportedly expressed strong support for the idea, signs the bill, Missouri will become the first state in the nation to fully exempt profits from the sale of stocks, real estate, cryptocurrency, and other capital assets from state income tax.

Proponents argue the move will encourage investment in The Show-Me State and potentially spur job creation and economic growth.

State Rep. Perkins (R-Bowling Green), who sponsored the bill, said the following in a release.

“This legislation is about creating a fairer tax system that supports growth and empowers individuals to keep more of their hard-earned money. I firmly believe this bill will have a great positive impact on our state’s economy and the financial well-being of our citizens.”

So, what does this mean for Missouri, and will other states follow? Here’s more of what you need to know.

Missouri set to become the first state to eliminate capital gains tax

Under the new bill, individuals would be able to deduct 100% of capital gains income reported on their federal tax returns when calculating their Missouri adjusted gross income for tax years beginning January 1, 2025, and beyond.

As mentioned, any profit realized from selling investments or property, whether stocks, bonds, land, or digital assets, would no longer be subject to Missouri’s state individual income tax.

The legislation also includes a trigger for corporations. If Missouri’s top corporate income tax rate drops to 4.5% or lower in the future, corporations could also deduct 100% of their capital gains income.

It’s worth noting that the bill passed the state legislature after negotiations that included additional tax breaks for older adults and disabled residents and new sales tax exemptions for diapers and feminine hygiene products (known as the "pink tax") to address equity concerns and secure broader support.

If approved, the $1.3 billion tax legislation would also offer tax deductions for farm sales to beginning farmers and expand energy efficiency incentives.

Other major tax changes in the bill include: replacing the state’s graduated income tax with a flat tax, reducing the corporate income tax rate, increasing the state standard deduction, and modifying several tax credits.

Capital gains tax rates for 2025

To appreciate the significance of Missouri’s move, it helps to review how capital gains are taxed at the federal level. Basically, the federal government distinguishes between short-term and long-term capital gains:

Short-term capital gains: Profits from assets held for one year or less are taxed as ordinary income, at rates up to 37% depending on the taxpayer’s income tax bracket.

Long-term capital gains: Profits from assets held for more than a year are taxed at preferential rates: 0%, 15%, or 20% — depending on filing status and taxable income. For most U.S. taxpayers, this rate is lower than their ordinary income tax rate, providing an incentive to hold investments longer.

• For example, in 2025, a single filer with taxable income under $48,350 pays 0% on long-term capital gains; those with higher incomes pay 15% or 20%.
• Some exceptions exist: collectibles may be taxed at up to 28%, and certain real estate gains at 25%.
• Additionally, capital losses can offset gains, and unused losses can be carried forward to future years.

For more information, see: Capital Gains Tax Rates for 2025

Unlike the federal system, however, Missouri previously taxed all capital gains as ordinary income, with no preferential rates for long-term gains. So, the new state law represents a dramatic departure from this approach.

What about other state capital gains tax?

While Missouri is moving to eliminate its capital gains tax, other states are taking the opposite approach, imposing special capital gains taxes or surcharges that can exceed ordinary income tax rates.

For instance, as Kiplinger has reported, Washington state, which doesn’t have a general state income tax, enacted a 7% tax on the sale or exchange of long-term capital assets like stocks, bonds, and business interests in 2022.

This tax applies to capital gains above a $250,000 threshold per year, per individual or couple. For high-income investors, this means Washington’s capital gains tax rate is higher than zero and also higher than what many states charge for ordinary income.

Washington is a notable example of a state targeting capital gains while not taxing wage income. (During last November’s elections, Washington voters rejected a ballot measure that called for repealing the state’s capital gains tax.)

Meanwhile, in Minnesota, capital gains are taxed as ordinary income, with rates reaching up to 9.85% for high earners. However, as of 2025, Minnesota also imposes a 1% surtax on capital gains for high earners, pushing the effective top capital gains rate to 10.85% for those in the highest bracket.

That is notably higher than the top federal long-term capital gains rate of 20% and is among the highest state rates in the country.

The Minnesota system is progressive, so different portions of an individual’s capital gains are taxed at different rates. However, high-income filers can expect to pay more than they would on regular earned income in many other states.

Several other states, including California, Oregon, and New Jersey, also tax capital gains at high ordinary income rates.

Who benefits from scrapping taxes on capital gains?

While other states have reduced income tax rates or offered targeted tax breaks, none have fully exempted capital gains from state income tax for individuals. However, not everyone agrees with Missouri’s bold step.

Some critics warn that the change will primarily benefit the wealthiest 5% of Missourians, as they are most likely to report significant capital gains. Additionally, since data show white, higher-income households disproportionately report capital gains, there are some concerns about economic inequality and racial disparities.

And then there’s the cost. Some data show the repeal could cost Missouri’s general revenue fund over $100 million annually, with some estimates as high as $262 million or more.

Opponents fear that lost revenue could reduce funding for education, infrastructure, and public services.

Missouri capital gains tax: Bottom line

Missouri’s elimination of the state capital gains tax for individuals starting in 2025 will be a landmark policy change.

If the legislation is signed by the governor, of course, investors will keep more of their profits from asset sales. The state could potentially see economic growth, along with budget impacts and debates over tax fairness.

But if the policy ends up being popular or an economic boost, it could set a precedent and inspire similar measures in other states. So, stay tuned.

Read More on Capital Gains Tax

• States With Low and No Capital Gains Tax
• Capital Gains: What's Taxable and How It's Calculated
• Homeowners Face Big Capital Gains Tax Bills

With 2025 well underway, these designated areas have reached a critical point — the original program authorization expires after 2026 without congressional intervention. What lies ahead for this tax incentive program that has directed billions toward opportunity zones?

The current state of opportunity zones

Created through the 2017 Tax Cuts and Jobs Act (TCJA), opportunity zones incentivize long-term capital deployment into these areas throughout the United States. The program provides substantial tax advantages to those who invest unrealized capital gains into qualified opportunity funds (QOFs), which subsequently finance businesses or real estate projects within designated zones.

Eight years into implementation, opportunity zones have evolved from an experimental policy concept into a recognized investment strategy. However, with the program's sunset provision approaching, stakeholders across the investment ecosystem are closely monitoring Washington for indicators about what comes next.

Administration support and legislative considerations

The current White House has positioned itself as a champion for opportunity zones, with President Trump publicly referring to them as an exceptional economic development program. This enthusiastic endorsement has established a positive foundation for discussions regarding extension.

Key figures overseeing economic policy and housing initiatives have demonstrated commitment to the OZ framework. Treasury Department leadership is expected to focus on clarifying tax implications and regulatory elements, while Housing and Urban Development officials are likely to utilize opportunity zones to promote affordable housing development and infrastructure improvements.

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Rather than advocating for isolated legislation centered solely on opportunity zones, the administration appears to favor incorporating extensions and modifications into a comprehensive tax reform package. This strategy enhances the possibility of successful passage through Congress despite partisan divisions.

Any tax legislation must proceed through specific congressional committees that will significantly influence the future of the initiative. The House has approved a budget framework that establishes parameters for upcoming tax negotiations.

While not specifically addressing opportunity zones, this framework proposes substantial tax reductions over the next decade, potentially creating a vehicle for extending the program.

Future scenarios for opportunity zones

Three primary possibilities have emerged regarding the program's future:

Option No. 1: Simple timeline extension

The most straightforward approach involves extending the program's deadlines. This would shift the capital gains tax deferral cutoff from 2026 to 2028 or later, providing investors additional time while maintaining the program's fundamental structure.

This basic extension would ensure continuity for ongoing projects while sidestepping more contentious policy debates.

Option No. 2: Zone reevaluation and expansion

A more comprehensive reform might allow state governors to nominate new opportunity zones using current economic data. This acknowledges economic conditions have evolved since the original designations some zones have experienced improvement, while other struggling areas may have been initially overlooked.

Refreshing zone designations could reinvigorate the program by directing investments toward communities with the most pressing contemporary needs. This approach could also broaden the program's impact in rural areas, which have historically attracted a disproportionately smaller share of OZ investment.

Option No. 3: Permanent program status

The most ambitious proposal would transform opportunity zones from a temporary initiative into a permanent feature within the tax code. This would eliminate the need for periodic renewals and create long-term certainty for investors and communities.

While establishing opportunity zones as a permanent program would represent a significant policy achievement, this option faces greater legislative challenges than other approaches.

Potential program enhancements under discussion

Various refinements to the opportunity zone framework are reportedly being considered:

• Investment structure flexibility. Allowing qualified opportunity funds to invest in other QOFs, enhancing flexibility and diversification possibilities.
• Broadened investment capital sources. Permitting investments from sources beyond capital gains, substantially increasing eligible investment capital.
• Strengthened accountability measures. Improving transparency through enhanced reporting requirements to better track investment patterns and economic outcomes.
• Reviving tax step-up benefits. Reinstating graduated tax benefits for investors maintaining their investments for extended periods, potentially with adjusted holding periods.
• Extended tax-deferral period. Pushing the deadline when investors must pay taxes on deferred gains beyond 2027, providing additional time for tax-advantaged investments.
• Rural investment incentives. Expanding zone designations in rural communities, enhancing incentives for broadband and infrastructure development and modifying compliance requirements to accommodate the longer time frames often necessary for rural development.

The real-world impact: Contrasting experiences

To appreciate what's at stake in these policy deliberations, consider the contrasting experiences of two communities participating in the opportunity zone program.

In Erie, Pa., the Erie Downtown Development Corporation has successfully leveraged the opportunity zone designation to transform the city's downtown district. The EDDC secured more than $27 million in opportunity zone investments as part of a broader $100 million revitalization initiative.

These funds have supported numerous projects, including renovating historic properties for mixed-use development featuring affordable housing components, a public marketplace and a culinary arts district.

Erie's experience illustrates how OZ investment can catalyze comprehensive community revitalization when combined with effective local leadership and a coherent development strategy.

In stark contrast, Clay County, Ky. — among America's most economically disadvantaged counties — has seen minimal benefit from its opportunity zone designations. Despite having three designated zones, the county had attracted virtually no OZ investment as of 2023.

The county's geographic isolation, infrastructure limitations and restricted economic development resources have created significant barriers to attracting investor interest, despite profound economic needs.

These divergent outcomes highlight both the program's transformative potential and the importance of thoughtful policy adjustments.

While success stories like Erie demonstrate the program's capacity to drive meaningful investments, the struggles experienced in places like Clay County underscore the need for refinements that could better direct capital toward the most severely disadvantaged communities.

Expected timeline and strategic approaches for investors

While some legislators have expressed optimism for rapid action on tax legislation, most observers consider Memorial Day deadlines unrealistic given the complexities involved.

A more reasonable expectation is that opportunity zone legislation will conclude in late 2025, potentially just before Congress recesses for the holiday period. This timing pattern frequently occurs with significant tax legislation, which often coalesces during the final months of a congressional session.

Given the evolving policy landscape, opportunity zone investors and fund managers should:

• Maintain investment activity under current guidelines while extensions remain uncertain
• Design investment structures with adaptability to accommodate potential regulatory changes
• Participate in advocacy initiatives by communicating success stories and engaging with elected officials
• Stay informed about legislative developments to make prudent investment decisions

Conclusion: A decisive period for opportunity zones

As we approach 2026, opportunity zones stand at a crucial juncture. The program has demonstrated its capacity to direct private capital toward communities requiring investment, but its future depends on forthcoming policy decisions.

The robust backing from the administration and key congressional figures provides grounds for optimism regarding an extension. However, the specific form this extension assumes — whether a straightforward timeline adjustment, comprehensive redesignation effort or permanent tax code incorporation — remains to be determined.

What seems evident is that opportunity zones have established themselves as valuable components of the economic development toolkit. Their ability to synchronize private-sector incentives with community needs represents a market-oriented approach to addressing geographic economic disparities that has garnered cross-spectrum political support.

For investors, community leaders and policymakers alike, the coming months represent a critical window to shape this innovative program's future.

Through thoughtful engagement in these discussions and learning from the program's initial seven years, stakeholders have an opportunity to strengthen opportunity zones and ensure they continue to stimulate economic development in the communities where it's most needed.

Related Content

• Striking Oil in Opportunity Zones: Now Might Be the Best Time to Invest
• Tax Advantages of Oil and Gas Investments: What You Need to Know
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Four Reasons to Tap Opportunity Zones Before They Expire

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Failing to plan for taxes can eat into your profits and leave you with far less than expected when you finally cash in on an investment.

Over the years, I’ve developed a deep respect for tax planning, and I want to share what I’ve learned about capital gains taxes — what they are, how they work and the strategies you can use to minimize them.

Whether you’re selling stocks, real estate or a business, understanding how capital gains taxes affect your bottom line is crucial to maximizing your profits.

What are capital gains taxes?

A capital gain occurs when you sell an asset for more than you paid for it. The government, of course, wants a piece of those profits, which is where capital gains taxes come into play. These taxes are imposed when you sell assets like:

• Stocks and bonds
• Real estate (except your primary residence, in some cases)
• Businesses
• Cryptocurrency
• Other investments like collectibles and artwork

There are two types of capital gains:

Short-term capital gains. If you sell an asset you’ve held for one year or less, your profit is taxed at your ordinary income tax rate (which can be as high as 37% for high earners).

Long-term capital gains. If you’ve held the asset for more than a year, the gain is taxed at lower, preferential rates — either 0%, 15% or 20%, depending on your income level.

The difference between short-term and long-term rates is significant. If I sell an investment too quickly, I might lose thousands of dollars in extra taxes that could have been avoided simply by holding on to the asset longer.

Key strategies to minimize capital gains taxes

After years of investing and selling assets, I’ve developed a few key strategies to help reduce capital gains taxes and keep more of my money where it belongs.

1. Hold investments for more than a year

The easiest way to minimize capital gains taxes is to hold on to investments for more than 12 months. This qualifies me for long-term capital gains tax rates, which are much lower than short-term rates.

Before selling an investment, I always ask myself: Can I afford to hold this for a few more months to save on taxes? Often, the answer is yes.

2. Use tax-loss harvesting

Tax-loss harvesting is one of my favorite strategies for reducing my tax burden. Here’s how it works:

• If I have stocks or assets that have lost value, I can sell them at a loss to offset my capital gains.
• If my losses exceed my gains, I can deduct up to $3,000 from my taxable income per year and carry over additional losses into future years.

For example, if I have $50,000 in capital gains but also $20,000 in losses, I pay taxes on only $30,000 instead of the full amount. This strategy can be a game changer for active investors.

3. Take advantage of the primary residence exclusion

For those selling real estate, there’s a powerful exemption available. If I’ve lived in my home for at least two of the last five years, I can exclude up to $250,000 ($500,000 for married couples) in capital gains from taxes when selling my primary residence.

This is one of the best tax breaks available, and I always factor it into my selling decisions when dealing with real estate.

4. Use 1031 exchanges for real estate

If I’m selling an investment property but want to reinvest in another, I can defer capital gains taxes using a 1031 exchange.

This IRS rule allows me to roll the profits into a similar property without paying taxes immediately. The key is that the new property must be of equal or greater value and the transaction must follow strict timelines.

This strategy has allowed me to grow my real estate portfolio without taking a major tax hit.

5. Gift or inherit assets for lower tax impact

Another way to reduce capital gains taxes is by gifting investments or passing them down through inheritance.

If I gift stocks or assets to family members in lower tax brackets, they might pay little to no capital gains taxes. If assets are inherited, the cost basis is “stepped up” to the market value at the time of death, meaning heirs don’t pay taxes on past gains.

This is a strategy I consider when planning generational wealth transfer.

6. Consider selling in retirement when income is lower

Since capital gains tax rates are tied to my income level, I plan my sales around lower-income years whenever possible.

In retirement, my income might be lower, meaning I could qualify for the 0% or 15% tax bracket instead of 20%. This means waiting to sell investments during retirement can save me thousands in taxes.

Why smart tax planning matters

Many investors focus only on making money but ignore tax consequences. I’ve learned that understanding capital gains taxes is just as important as picking the right investments.

Poor planning can result in unnecessary tax bills, while smart strategies can preserve more of my wealth.

Before selling any asset, I always ask myself:

• Is this the right time to sell based on tax implications?
• Can I hold this investment longer to qualify for lower tax rates?
• Are there losses I can use to offset my gains?
• Is there a way to reinvest without triggering a tax event?

By thinking strategically, I’ve been able to keep more of my profits, reinvest wisely and grow my portfolio faster.

Final thoughts

Capital gains taxes are an unavoidable part of investing, but they don’t have to take a huge bite out of your profits.

By understanding the tax code and using smart planning strategies, you can legally minimize your tax burden and keep more of what you earn.

Related Content

• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• Capital Gains Tax Rates: 2024 and 2025
• Capital Gains Tax on Real Estate and Home Sales
• Capital Gains Tax Exclusion for Homeowners: What to Know

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

When retail investors buy a bond, stock or ETF, they are investing in or lending money to a publicly traded company. Currently, there are about 3,500 publicly traded companies with over $100 million in annual revenue. Conversely, there are about 18,000 companies that aren’t publicly traded with over $100 million in annual revenue. Some notable examples include Publix, Burger King, Fidelity Investments, SpaceX and OpenAI.

Just because a company isn’t publicly traded doesn't mean you can’t invest in it or lend money to it. You can invest in private companies by investing in a private equity fund.

Investing in private equity

According to investment data company Prequin, since the end of 2000, the global private equity index delivered an annualized return of 10.5%, while a global public equity portfolio produced a 7% return. That’s a 3.5 percentage-point difference in average annual returns. One of the reasons for this outperformance is it’s cheaper to invest in private companies than public stocks. When you invest in the S&P 500, you are paying almost 28 times earnings, as of 2025. When private equity funds invest in private companies, they may pay only six to 15 times earnings.

Historically, private equity funds have been available only to ultra-wealthy families, institutions and endowment funds. Today, they are available to most affluent accredited investors. Accredited investors, individually or with a spouse, have a net worth of at least $1 million (excluding their primary residence).

Investing in private credit

While most retail investors buy bonds or bond funds to diversify their portfolios, the best-performing income asset class over the past 20 years has been private credit. Private companies can’t issue bonds like publicly traded companies. Also, banks typically don’t make operating loans to private companies. When private companies need to raise capital, they often borrow from private credit funds — and pay a high rate for the funds they borrow.

However, these companies can use the short-term loans to increase corporate profits. While investment-grade bonds may yield 4% to 5%, private credit funds are yielding about 10%. Private credit funds have similar volatility to investment-grade bonds and fewer defaults than high-yield bonds, with superior yields to both asset classes.

While private credit funds were historically available to the ultra-wealthy, they are now available to accredited investors. Knowledgeable affluent investors use bank notes (a form of private credit) to beat the stock market when it’s appreciating and lose less when stocks are going down.

It is hard to know which manager will outperform or which stocks will go up the most. Bank notes linked to stock indexes currently allow investors to double the returns of the index on a guaranteed basis with less investment risk than owning the index. These notes are subject to the credit risk of the issuing banks, so it is wise to work with the strongest banks.

Taxes and private placement life insurance

One problem with making a large profit from your investments is the fact that the government wants its share. Therefore, investors must pay taxes on their realized gains and the generated income. Since the ultra-rich tend to be in the highest tax bracket, they would prefer not to pay taxes on their investments.

One of the strategies they use to avoid those taxes is private placement life insurance (PPLI). Under IRS Section 7702, all realized gains and income that occur within a life insurance policy are not taxable. The policy owner can take tax-free withdrawals and loans from the contract. Plus, all proceeds are income tax-free to the beneficiary at the insured’s death.

But the ultra-wealthy aren't buying traditional “off-the-shelf” life insurance policies that earn 4% to 5% per year. They are using private, custom contracts that allow them to invest in private equity, private credit, structured notes and other alternative investments with high expected returns.

They can invest the same way they were going to invest inside or outside the insurance contract, but if they invest inside of the PPLI insurance contract, they will not owe state or federal income taxes. A $5 million investment made over four years growing at 8% taxable will grow to about $12.5 million over 20 years. But the same investment in a PPLI will grow to about $17.5 million. Historically, you needed about $20 million to own a private placement life insurance policy. But now, investors with as little as $2 million can own one and avoid taxes like the ultra-wealthy.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Singer Wealth Advisors is an SEC registered investment advisory firm. Registration with the SEC does not imply a certain level of skill or training. SWA is not a tax professional. Discuss with your financial/tax professionals before investing. Investing involves risk. Past performance does not guarantee future results. Material provided for informational purposes only.

Related Content

• Why You Should Consider Private Equity in Your Investment Portfolio
• What to Consider Before Choosing Alternative Investments
• What Is an Initial Public Offering (IPO)?
• Whole Life Insurance: A Multipurpose Financial Planning Tool
• Why Your Life Insurance Should Cover More Than Just Death

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Here’s an overview of how zero-coupon DSTs work, the specific tax benefits they offer and why they can be a strategic addition to a high-income retiree’s portfolio.

How is a zero-coupon DST different from a traditional DST?

A Delaware statutory trust is a legal structure used in real estate investing that allows multiple investors to hold fractional interests in large, institutional-grade properties, such as commercial buildings, multifamily complexes or industrial assets. DSTs have become particularly popular among investors using 1031 exchanges, a section of the U.S. tax code that allows for the deferral of capital gains taxes on the sale of investment properties, provided the proceeds are reinvested in like-kind real estate.

A zero-coupon DST differs from a traditional DST in that it does not pay regular distributions to investors. Instead, all income generated by the property is used to pay down debt. This approach leads to a more favorable loan-to-value (LTV) ratio, providing a substantial tax benefit and the potential for wealth accumulation. For high-income retirees who prioritize tax efficiency, zero-coupon DSTs offer a compelling way to manage income and maximize after-tax returns.

Key tax benefits of investing in a zero-coupon DST

1. Capital gains tax deferral through a 1031 exchange

One of the primary tax benefits of investing in a zero-coupon DST is the ability to defer capital gains taxes through a 1031 exchange. When retirees sell highly appreciated real estate assets, they face substantial capital gains taxes, which can erode a significant portion of their wealth. By reinvesting proceeds from the sale into a zero-coupon DST, retirees can defer these taxes indefinitely, preserving more of their capital for reinvestment.

By choosing a zero-coupon DST as the replacement property, retirees gain access to institutional-grade assets while minimizing the tax burden associated with selling appreciated property. This deferral strategy can be repeated across generations, allowing investors to pass down a tax-deferred asset base to heirs, which can further enhance legacy and estate planning.

2. Enhanced depreciation deductions

Depreciation is a powerful tax deduction available in real estate investing, allowing property owners to deduct a portion of the property’s cost over its useful life, thereby reducing taxable income. Zero-coupon DST properties, which typically include high-value assets with substantial building and improvement costs, offer enhanced depreciation deductions.

For high-income retirees, depreciation can offset passive income from other investments, creating an effective way to reduce tax obligations. Since zero-coupon DSTs are structured with no income distributions during the term, depreciation deductions can often exceed any remaining taxable income, resulting in significant tax savings. These “paper losses” can be especially advantageous for retirees in high tax brackets, as they reduce overall taxable income and provide relief in terms of current-year tax liabilities.

3. No additional taxable income until sale or maturity

A unique feature of zero-coupon DSTs is their lack of ongoing income distributions, which means there’s no regular taxable income to report while the investment is held. Instead, the income generated by the property goes toward paying down the loan on the property, increasing the investor’s equity over time without increasing their tax liability. This structure is advantageous for high-income retirees who want to minimize additional taxable income.

Unlike traditional real estate investments or income-generating DSTs, a zero-coupon DST doesn’t require investors to report ongoing income, which can push retirees into higher tax brackets or expose them to additional Medicare surcharges. By deferring income until the end of the investment period, zero-coupon DSTs help retirees maintain control over their income and taxes, creating a more predictable and manageable tax situation.

4. Debt paydown leading to increased equity

Because all income generated by a zero-coupon DST is directed toward debt repayment, the investor’s share of equity in the property increases over time. This gradual increase in equity creates a wealth accumulation effect without producing taxable income. When the property is eventually sold or matures, investors benefit from a higher equity position, which can lead to a more favorable return on investment (ROI) when the asset is liquidated.

For retirees, this debt paydown structure is particularly beneficial, as it provides a path to wealth growth without the annual tax obligations typically associated with other investment income. High-income retirees can preserve cash flow and delay taxation until the asset is sold, allowing them to strategically manage their tax situation and financial needs in retirement.

5. Step-up in basis for heirs

For retirees focused on estate planning, zero-coupon DSTs offer an additional tax benefit through a step-up in basis. When a DST investment is passed on to heirs, the property’s basis is “stepped up” to its current market value at the time of the owner’s death. This step-up effectively eliminates any capital gains tax liability that would have been owed on the property’s appreciation during the original owner’s lifetime.

This tax benefit is particularly advantageous for high-income retirees who want to minimize tax burdens on their heirs. By reinvesting in a zero-coupon DST, retirees can defer capital gains taxes during their lifetime and transfer an appreciated asset to heirs without triggering a tax liability. For heirs, this means they receive the full value of the asset without the weight of capital gains tax, enabling a more seamless transfer of wealth.

Balancing risks and rewards

While zero-coupon DSTs offer substantial tax benefits, they’re not without risks:

• Zero-coupon DSTs are illiquid, meaning investors typically cannot access their capital until the end of the DST’s term. Retirees considering this investment should ensure they have sufficient liquidity in other areas of their portfolio for emergency or lifestyle needs.
• Additionally, real estate market conditions can affect the value of the DST property at maturity, so it’s essential to work with a trusted adviser who understands the complexities of DST investments and can help structure them to align with your long-term goals.

Why zero-coupon DSTs are well-suited for high-income retirees

For high-income retirees, zero-coupon DSTs offer a combination of tax deferral, estate planning advantages and the potential for appreciation without the downside of annual income taxation. Unlike traditional income-generating real estate investments, zero-coupon DSTs provide a unique way to accumulate wealth over time without triggering annual tax liabilities. This tax-efficient structure makes them ideal for retirees who want to preserve wealth, optimize taxes and secure assets for the next generation.

Zero-coupon DSTs are an innovative investment for high-income retirees seeking to maximize tax advantages and manage taxable income. By combining capital gains deferral, enhanced depreciation deductions and no taxable income during the investment term, zero-coupon DSTs deliver a tax-efficient way to participate in real estate. With added estate planning benefits such as a step-up in basis, zero-coupon DSTs enable retirees to preserve wealth and optimize tax outcomes for themselves and their heirs.

High-income retirees should work with knowledgeable financial and tax advisers to assess whether a zero-coupon DST aligns with their financial goals and risk tolerance. When structured correctly, zero-coupon DSTs offer a compelling blend of wealth accumulation, tax efficiency, and legacy planning — making them a valuable addition to the portfolios of tax-conscious, high-income retirees.

Related Content

• Asset Protection for Affluent Retirees in 2025
• How to Use DSTs and 1031 Exchanges for Diversification
• Cost Segregation: Six Real Estate Businesses That Can Benefit
• Six Risks of Delaware Statutory Trusts in 1031 Exchanges
• Five Strategies to Defer Capital Gains in Real Estate Investing

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Private equity’s potential benefits in terms of true diversification in a concentrated market, alignment of interests for long-term success and strong performance make it an investment category worth considering. Unique and substantial tax benefits can be obtained by investing in private equity.

One such potential tax benefit is Internal Revenue Code (IRC) Section 1202; this provision allows individuals to exclude up to 100% of the capital gains realized from the sale of qualified small business stock (QSBS). Certain criteria must be met to qualify as a Section 1202 stock. This article will explore the eligibility criteria for QSBS, gain exclusion percentage, limitations and strategic implications.

Eligibility criteria for qualified small business stock

The aforementioned capital gain tax exclusion not only encourages investment in small businesses but also presents significant tax-saving opportunities for investors and entrepreneurs alike. To leverage the benefits of IRC Section 1202, it’s essential to understand the stringent requirements that define QSBS.

C corporation status

The issuing entity must be a domestic C corporation at the time of stock issuance. S corporations and partnerships do not qualify under this provision; however, LLCs that have elected to be taxed as a C corporation are eligible.

Gross assets limitation

At the time of issuance and immediately thereafter, the corporation’s aggregate gross assets must not exceed $50 million.

Original issuance

Investors must acquire the stock directly from the company, not through secondary market transactions.

Active business requirement

During substantially all of the investor’s holding period, at least 80% of the corporation’s assets must be utilized in the active conduct of a qualified trade or business. Certain service-based businesses, such as those in health, law or consulting, are excluded from this definition.

Holding period

The investor must hold the QSBS for more than five years to be eligible for the capital gains exclusion.

These requirements are designed to foster, encourage and incentivize long-term investment into small growth-oriented businesses.

Gain exclusion percentage

IRC Section 1202 was enacted in 1993 and has undergone several amendments affecting the percentage of gain exclusion. An investor’s capital gain exclusion is dependent on the timing of such investment:

• 50% exclusion: For stock acquired between August 10, 1993, and February 17, 2009, 50% of the gain could be excluded.
• 75% exclusion: This increased to 75% for stock acquired from February 18, 2009, to September 27, 2010.
• 100% exclusion: For stock acquired on or after September 28, 2010, the exclusion rose to 100%, significantly enhancing the appeal of QSBS investments.

Limitations

Section 1202 was enacted to encourage investment in small businesses. While the tax benefits are substantial, knowing the provision’s limitations is important:

Exclusion cap

The maximum gain eligible for exclusion is the greater of $10 million or 10 times the investor’s basis in the QSBS. This cap applies on a per-issuer basis, allowing investors to potentially multiply exclusions by investing in multiple qualified small businesses.

Alternative minimum tax

For stock acquired before September 28, 2010, the excluded gain is treated as a preference item for alternative minimum tax (AMT) purposes, potentially affecting the investor’s tax liability. However, for stock acquired on or after this date, the gain exclusion is not considered a preference item, thereby not impacting AMT calculations.

Strategic implications

Entrepreneurs should consider structuring their startups as C corporations to attract investors adept at investing in private equity seeking QSBS benefits. For investors and entrepreneurs alike, IRC Section 1202 presents a strategic avenue for tax-efficient investment:

Investment incentive

The potential to exclude up to $10 million in capital gains per issuer is a powerful incentive for investors to invest in small, growth-oriented businesses. The potential tax benefits are substantial.

Estate planning

Gifting QSBS to family members or trusts can be a powerful tool in estate planning. This strategy can multiply the available gain exclusion, as each recipient is entitled to their own $10 million exclusion limit, thus magnifying the transfer of wealth in a tax-efficient manner.

Private equity investment does not come without risks, which I've outlined in a prior article. But reasons to consider private equity in your investment portfolio include diversification and alignment of investor interests. In addition, the substantial tax benefits IRC Section 1202 offers investors willing to commit to long-term investments in small businesses is just another reason to consider the appropriateness of investment in private equity.

By understanding and navigating the specific requirements and limitations of this provision, both investors and entrepreneurs can strategically position themselves to maximize benefits, potentially helping one find the right balance between risk and reward in their investment strategy.

Related Content

• Why Private Markets Are a Diversification Superpower
• Now Could Be Time for Private Investors to Make Their Mark
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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

So, what is a 1031 exchange and why is it beneficial for real estate investors? A 1031 exchange, also known as a like-kind exchange, is a real estate investing strategy that allows investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a like-kind property.

The outlook for 1031 exchanges

Trump, a former real estate developer, has long supported the 1031 exchange provision, even while it was under threat of elimination from the Tax Cuts and Jobs Act (TCJA). When the TCJA took effect in January 2018, 1031 exchanges were left largely untouched, but the act eliminated personal property exchanges. Trump’s administration is expected to maintain existing 1031 rules without significant changes.

With Republicans taking the majority in the presidency, House and Senate, Democrat-driven proposals, such as a $500,000 cap on 1031 exchanges, are not expected to hold with the new administration. With no opposing party influence on upcoming tax legislation, the focus will likely shift to maintaining or strengthening the current tax incentives for real estate investors.

However, the Trump administration’s plans to impose tariffs may have indirect consequences for the real estate market. Economists warn that higher tariffs could lead to increased consumer prices and inflation. Rising inflation often triggers interest rate hikes by the Federal Reserve, which could dampen activity in the commercial real estate sector. While such challenges bolster arguments for retaining 1031 exchanges as a vital tax-deferral strategy, investors should stay alert to the broader economic ripple effects.

Benefits of 1031 exchanges for investors

Real estate investors stand to gain considerable advantages from the continuation of 1031 exchanges. By deferring capital gains taxes, investors can reinvest the full proceeds from a sale into new investment or business properties, compounding their purchasing power and accelerating portfolio growth.

For example, rather than paying up to 20% in federal capital gains taxes, plus potential state and local taxes, investors using a 1031 exchange can use their capital gains to invest in larger or more lucrative assets. This reinvestment strategy promotes diversification, passive income generation and long-term wealth accumulation.

Maintaining cash flow and minimizing tax liabilities become even more critical in a high-interest-rate environment. Given that the incoming administration supports tax-deferral strategies such as 1031 exchanges, investors may be more comfortable using these kinds of exchanges in real estate transactions.

Steps investors can take to capitalize on 1031 exchanges

Real estate investors should consider the following actionable strategies to leverage 1031 exchanges effectively:

1. Refresh your knowledge of 1031 rules

To avoid missteps, ensure you understand the core requirements of a 1031 exchange, including:

• The 45-day timeline to identify replacement properties
• The 180-day deadline to close on the new property
• Working with a qualified intermediary

Staying informed about the 1031 exchange rules can help you meet the deadlines and comply with all regulations. That’s critical because if you break the rules, you’ll be on the hook for capital gains taxes.

2. Identify backup properties

Given the challenges posed by inflation and rising interest rates, property availability and valuations may fluctuate, potentially affecting your primary choices. To mitigate these risks, it may be a good idea to identify multiple like-kind replacement properties within the 45-day identification period mandated by 1031 exchange rules.

This identification period begins the day the relinquished property is transferred and concludes at midnight on the 45th day. During this window, you can list several potential replacement properties without committing to purchasing all of them. Having backup options provides flexibility if unforeseen circumstances make your initial selections unviable, ensuring a smoother transaction process.

3. Advocate for 1031 exchanges locally

1031 Crowdfunding offers an online form for investors to contact their congressional representatives about supporting 1031 exchanges. By participating in such efforts, investors can help secure favorable legislative outcomes.

4. Explore Delaware statutory trusts (DSTs)

For those struggling to find suitable replacement properties, a Delaware statutory trust (DST) is a popular backup plan. DSTs allow investors to acquire fractional ownership in professionally managed properties while still qualifying as replacement property in a 1031 exchange. This option provides a streamlined, passive investment pathway while preserving tax-deferral benefits.

The probability of continued support for 1031 exchanges under the Trump administration provides a strong foundation for real estate investors to grow their portfolios without the immediate burden of capital gains taxes. While external factors such as tariffs and inflation may create headwinds, these challenges only underscore the importance of retaining this valuable tax provision.

Investors have promising opportunities under the current 1031 framework that will likely continue for the foreseeable future. As always, consulting a real estate and tax professional is essential to ensure informed decisions that align with and support your long-term financial goals.

Related Content

• ‘Boot’ in a 1031 Exchange: What It Is and How to Minimize Tax Implications
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• Three Tax-Smart Strategies for Real Estate Investing
• 11 Reasons to Consider a 1031 Exchange
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But wait! Before you pop the champagne, there's a party crasher you need to deal with: capital gains tax.

Don't worry, though. We've got some strategies to help you keep more of your hard-earned profits. Welcome to the world of real estate tax deferral strategies.

The real estate market: A seller's paradise

If you're a real estate investor in 2025, you're probably feeling pretty good right now. The market is favoring sellers, with limited inventory driving up prices. Interest rates have stabilized and might even be on their way down later this year. It's a great time to cash in on your investments, but no one wants to hand over a big chunk of their profits to the taxman.

That's where tax deferral strategies come in. These aren't magic tricks to make your taxes disappear, but they are legitimate ways to postpone or potentially decrease your capital gains tax. The goal? To keep more money in your pocket and work for you.

Working to reduce your capital gains tax is a delicate dance and one that must be undertaken quite carefully. As always, it’s good advice to work with an experienced and knowledgeable team that knows every move and how to make them. With that in mind, let’s explore five savvy strategies that can help you keep as much of your hard-earned money.

Strategy No. 1: The low-income-year limbo

Imagine you're playing limbo with the IRS. The lower you go (in income), the better you do. That's the basic idea behind our first strategy: selling assets during a low-income year.

Here's how it works:

Meet Jack, a successful real estate investor. He owns several properties, including a small apartment building he bought for $500,000 five years ago. It's now worth $800,000, which means he's looking at a $300,000 capital gain if/when he sells.

Typically, Jack's income puts him in the highest tax bracket. But this year, he's taking a sabbatical to travel the world (lucky guy!). His income will be much lower than usual.

By selling his apartment building this year, Jack can take advantage of lower tax rates on his capital gains. Instead of paying 20% (the highest long-term capital gains rate), he might pay only 15% or even 0% if his income is low enough.

The key here is to understand your capital gains tax rate is determined by your overall taxable income. So, if you can time your property sale to coincide with a year when your income is lower, you could save a bundle. Be sure to work your tax professional into the conversation for some personalized, up-to-the-minute advice if you’re timing a transaction like this.

Strategy No. 2: The installment sale shuffle

If the idea of a big lump sum (and the accompanying tax bill) makes you nervous, you might want to try the installment sale shuffle.

An installment sale proceeds something like this:

Sarah owns a commercial property worth $1 million. She bought it for $600,000 a few years ago, so she's looking at a $400,000 capital gain. Instead of selling it outright, she agrees to an installment sale with the buyer.

The buyer pays Sarah $200,000 upfront and agrees to pay the remaining $800,000 over the next four years. This spreads Sarah's capital gain over five tax years instead of hitting her all at once.

In year one, Sarah recognizes only 20% of her capital gain ($80,000), significantly reducing her tax burden for that year. Plus, she gets to defer taxes on the rest of the gain until she receives the payments.

But remember, there are rules to this dance:

• The first installment must be paid within one year after the tax year of the sale.
• You need to record the sale on IRS Form 6252.

It's like eating your favorite dessert over a week instead of all at once — you still get to enjoy it, but without the sugar rush (or in this case, the tax hit).

Strategy No. 3: The charitable cha-cha with donor-advised funds

Who says you can't do good and save on taxes at the same time? Enter the donor-advised fund (DAF), a charitable investment account that lets you support your favorite causes while potentially reducing your tax bill.

Let’s consider the case of Tom, who just sold a rental property for a $500,000 gain. Instead of facing a hefty tax bill, he decides to open a DAF and contribute $100,000 of his gains.

Tom gets an immediate tax deduction for his contribution, which helps offset the capital gains tax on his property sale. Plus, the money in the DAF can be invested and grow tax-free. Tom can then recommend grants from the fund to his favorite charities over time.

It's like having your cake, eating it, too, and then sharing it with others — all while the IRS picks up part of the tab. Keep in mind there are adjusted gross income limitations with DAFs, and always run your plans by your tax advisers.

Strategy No. 4: The 1031 exchange two-step

Now, let's talk about the granddaddy of all real estate tax deferral strategies: the 1031 exchange, also known as a "like-kind exchange." 1031 exchanges have been around for about a hundred years, and when you soak in the advantages, it’s easy to see why:

Lisa owns a small office building that she bought for $1 million. It's now worth $1.5 million. Instead of selling and paying taxes on the $500,000 gain, Lisa decides to do a 1031 exchange.

She sells her office building and uses all the proceeds to buy a larger commercial property worth $2 million. Because she's essentially swapping one investment property for another, Lisa can defer paying taxes on her $500,000 gain.

But be careful. The 1031 exchange rules are strict:

• The new property must be "like-kind" (generally, any real estate held for investment qualifies) and generally cost at least as much as, or more than, the relinquished property.
• You must identify potential replacement properties within 45 days of selling your original property and close on the new property within 180 days. (See a timeline for 1031 exchanges.)
• The money — the proceeds from the sale of the original property — must be held by a qualified intermediary (QI), who is also responsible for transmitting it to the entity selling the new property. The QI facilitates the transaction in many other ways, as well.

The 1031 exchange can be a powerful tool, especially for building a real estate empire. You can potentially defer taxes indefinitely by continually rolling your gains into new properties. And if you hold on to these investments until you pass away, your heirs might even receive a "step-up in basis," potentially eliminating the capital gains tax liability altogether.

Strategy No. 5: The opportunity zone tango

Our final strategy involves investing in qualified opportunity zones (QOZs) — economically distressed communities identified by the government as needing investment. Unlike 1031 exchanges, QOZs have a fairly recent operating history, having their origins in the Tax Cuts and Jobs Act (TCJA) of 2017.

Let’s look at Mark, who just sold a property and has $1 million in capital gains. Instead of paying taxes on this gain, he invests the full amount into a qualified opportunity fund (QOF) that's developing properties in a QOZ.

By doing this, Mark can defer paying taxes on his $1 million gain until December 31, 2026 (or until he sells his QOF investment, whichever comes first). That’s a great benefit. But the real magic comes if he holds his QOF investment for at least 10 years … because he'll pay zero capital gains tax on any appreciation of his QOF investment after that.

It's like the government is giving you a tax break for helping revitalize communities. Talk about a win-win.

The grand finale: Putting it all together

Now that we've explored these strategies, you might be wondering, "Which one is right for me?" The answer, as with most things in finance, is: It depends.

Your specific situation, goals and risk tolerance will all play a role in determining the best strategy (or combination of strategies) for you. That's why it's crucial to work with a team of professionals who understand both real estate and taxes.

Think of it like assembling your own tax-deferral dream team:

• A savvy real estate broker to help you identify great investment opportunities
• A knowledgeable CPA to navigate the complex tax landscape
• A skilled financial adviser to ensure your real estate strategy aligns with your overall financial goals
• And in the case of 1031 exchanges, a qualified intermediary who can quarterback your transaction from beginning to end

Together, this team can help you choreograph a tax-deferral strategy that keeps you dancing all the way to the bank.

The curtain call: Final thoughts

Remember, the goal of these strategies isn't just to defer taxes indefinitely. Tax deferral is a means to an end: It's really about keeping more of your money working for you, potentially increasing your returns over time and aligning your real estate investments with your broader financial objectives.

Tax laws and regulations are always changing, so what works today might not work tomorrow. Stay informed, stay flexible, and don't be afraid to adjust your strategy as needed.

So, the next time you're facing a big capital gains tax bill on your real estate investment, don't panic. Take a deep breath, put on your dancing shoes and remember: With the right moves, you can keep more of your profits while the taxman waits in the wings.

Related Content

• What Is Capital Gains Tax Deferral?
• Top 10 Myths About 1031 Exchanges, Debunked
• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 721 Exchange to Defer Taxes: Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Named after Section 1031 of the Internal Revenue Code, this powerful tax-deferral strategy has been the subject of more myths than Bigfoot and the Loch Ness Monster combined. Today, we're going to dive into the murky waters of 1031 exchange misconceptions and emerge with clarity, humor and, hopefully, a better understanding of this invaluable tool.

1. 'A 1031 exchange is just a way for the rich to avoid paying taxes'

Ah, the classic "tax loophole for the wealthy" misconception. While it's true that many high-net-worth individuals use 1031 exchanges, they're not exclusive to the country club set. In reality, 1031 exchanges are available to anyone who owns investment or business property. Whether you're a small-time landlord with a single rental house or a corporate real estate mogul, the 1031 exchange doesn't discriminate. It's less about avoiding taxes and more about deferring taxes to reinvest in new properties. Think of it as the government's way of saying, "Keep growing your real estate empire, and we'll talk taxes later."

2. 'You can exchange any type of property in a 1031 exchange'

If only it were that simple. Unfortunately, you can't swap your collection of rare Beanie Babies for a beachfront condo and expect the IRS to give you a thumbs-up. 1031 exchanges are specifically for real property used for investment or business purposes.

Your primary residence? Sorry, that's a no-go. Your vintage car collection? Nope. Your cryptocurrency? Not a chance. The key here is "like-kind" real estate. But don't worry, the definition of "like-kind" is broader than you might think. You can exchange a farm for an office building, or an apartment complex for raw land. Just remember: If it's not real estate, it's not eligible for a 1031 exchange.

3. 'A 1031 exchange means I'll never have to pay taxes on my real estate gains'

Wouldn't that be nice? Unfortunately, a 1031 exchange isn't a magical tax-disappearing act; it's more like a really long game of "kick the can down the road." You're deferring taxes, not eliminating them. Eventually, when you sell a property without doing another 1031 exchange, Uncle Sam will come knocking for his share. But here's the silver lining: If you keep exchanging properties until you pass away, your heirs can inherit the property at a stepped-up basis, potentially avoiding a significant portion of those deferred taxes (and maybe even close to 100% of them). It's like the ultimate long game in Monopoly, but with real money.

4. 'I have 45 days to identify a replacement property and 180 days to close the deal: That's plenty of time'

Oh, sweet summer child. If you think 45 days is a long time in the real estate world, you're in for a rude awakening. The 45-day identification period and 180-day closing period are set in stone by the IRS, and it waits for no one. Holidays, weekends, your cousin's destination wedding — none of these will extend your deadline. These time constraints can feel tighter than skinny jeans after Thanksgiving dinner.

Pro tip: Start looking for replacement properties before you even close on the sale of your relinquished property. Time management is key, unless you enjoy high-stakes, real estate-themed adrenaline rushes.

5. 'I can use the proceeds from my property sale however I want before reinvesting'

If you're picturing yourself lounging on a beach, sipping a piña colada bought with the proceeds from your property sale while you casually look for a replacement property, think again. One of the cardinal rules of a 1031 exchange is that you never, ever touch the money from the sale. It must go directly to a qualified intermediary. If you so much as glimpse those funds, your exchange could be disqualified faster than you can say "taxable event." The intermediary will hold on to the funds and use them to purchase the replacement property on your behalf. Consider it a financial chastity belt, if you will.

6. 'A 1031 exchange is too complicated for the average investor'

While it's true that a 1031 exchange isn't as simple as a standard buy-and-sell transaction, it's not quantum physics either. Yes, there are rules to follow and deadlines to meet, but with the right team of professionals — a knowledgeable real estate agent, a savvy tax adviser and a qualified intermediary — you can navigate the process successfully. It's like assembling IKEA furniture: It might look daunting at first, but with the right instructions and tools, you'll have that BILLY bookcase (or in this case, a successful 1031 exchange) put together in no time.

7. 'I can exchange my property for one of lesser value and pocket the difference'

Nice try, but the IRS is always one step ahead. If you exchange your property for one of lesser value, the difference (known as boot) will be taxable. The goal of a 1031 exchange is to defer 100% of the tax, which means reinvesting all of the equity from your relinquished property into your replacement property. If you're looking to cash out, a 1031 exchange might not be the best strategy for you.

Remember, it's "defer" not "disappear" when it comes to taxes in a 1031 exchange.

8. 'I can do a 1031 exchange on my flip properties'

Flipping houses might make for great TV, but it doesn't make for a great 1031 exchange strategy. Properties that are held primarily for resale (i.e., fix-and-flip properties) don't qualify for 1031 exchanges. The IRS views these as inventory, not investment properties. To qualify for a 1031 exchange, you generally need to hold the property for at least a year and a day, and it should generate rental income. So, if you're a serial flipper, you might need to flip your strategy to take advantage of 1031 exchanges.

9. 'A 1031 exchange is only worth it for high-value properties'

While it's true that the more valuable the property, the more substantial the potential tax deferral, don’t discount the power of 1031 exchanges for more modest investments. Even if you're dealing with properties in the $200,000 to $500,000 range, the tax savings can be significant. Plus, 1031 exchanges allow you to consolidate multiple smaller properties into one larger property, or vice versa. It's like playing real-life Monopoly, but instead of little green houses, you're dealing with actual real estate. And let's be honest, that's way more exciting.

10. 'Once I start a 1031 exchange, I'm committed to completing it'

Fear not, commitment-phobes. Starting a 1031 exchange doesn't mean you're locked in. If you can't find a suitable replacement property, or if the market conditions change and you decide it's better to pay the tax, you can always back out. Yes, you'll end up paying the capital gains tax you would have owed anyway, but you're not obligated to complete the exchange. It's like a real estate prenup — you have an exit strategy if things don't work out. And of course, there's an even better way to "fail" at a 1031 exchange and yet preserve all those tax breaks ... by completing the exchange with a Delaware statutory trust, or DST. You're not only keeping the tax breaks intact, but you’re also almost certainly upgrading the quality of your real estate portfolio and taking a hands-off approach to your investment.

In conclusion, while 1031 exchanges can seem as complex as a Rubik's Cube, understanding these common misconceptions can help you approach this powerful investment tool with confidence. Remember, knowledge is power, especially when it comes to real estate investing.

With a firm grip on the fundamentals and a well-picked coterie of financial advisors, including a qualified intermediary at your side, you can use Section 1031 of the Internal Revenue Code to your advantage, instead of Uncle Sam's.

Related Content

• 10 Ways Your 1031 Exchange Can Go Horribly Wrong
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• What Is Capital Gains Tax Deferral?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

But in practice…

The not-so-simple truth is that a series of intricate IRS 1031 exchange rules govern the successful completion of these transactions. As a result, deals can unravel in a costly fashion due to even innocent missteps among this network of lengthy, rigidly enforced provisions. The result can be an unforeseen tax bill that can present nightmares for even the most well-heeled investors.

Accordingly, it’s critical for investors to enter like-kind exchanges cautiously, well-informed of the multiple risks undermining an improperly executed 1031 exchange and accompanied by a financial team that’s both knowledgeable and experienced in this nuanced area.

Let’s look at some of the multiple tripwires that can result in a tax-saving strategy’s unintended conversion into a tax nightmare for underprepared investors.

1. Blown deadlines

Two critical timelines must be adhered to in any 1031 exchange. First, the investor must identify a replacement property (or properties) within 45 days of the sale of the relinquished property. Second, and just as important, the transaction to acquire the replacement property must be completed within 180 days of the original sale. It’s important to note that the statute refers to calendar days, not business days — failure to account for weekends or holidays will not serve as an excuse.

The IRS’ inflexibility on this point is well documented. In fact, the only known extensions to 1031 deadlines have been the result of disaster relief from the IRS, and in these cases, it requires the IRS to issue a Disaster Relief Notice and post it on its website. Even a declaration of disaster from FEMA is not sufficient.

Due to personal emergencies, investors sometimes believe they deserve exceptions or waivers on deadlines, but apart from a Disaster Relief Notice, the rules forbid flexibility or deviations — even for sympathetic grounds such as medical issues or family deaths that occur during transactions.

2. Failure to identify a replacement property within 45 days or complete the exchange within 180 days

Closely related to the first failure, it’s important to know what the IRS means by “identifying” a replacement property and “completing” the transactions.

There are two accepted ways of identifying a replacement property:

• By completing the purchase of the replacement property within 45 days (at which point no written identification is needed, as the purchase itself satisfies the identification requirement)
• More commonly, by written Identification Notice through the qualified intermediary

The taxpayer should sign a qualifying Identification Notice, which should be clear, specific and unambiguous and should be delivered to the qualified intermediary (QI) or some other party representing the seller of the replacement property no later than midnight of the 45th calendar day after the sale of the relinquished property.

Similarly, completing the purchase of the replacement property means that the transaction is finalized no later than midnight on the 180th day following the sale of the original property.

In addition, the exchanger must file Form 8824 with their federal tax return for the year in which the exchange took place. Failure to close the transaction in a timely manner, or to report it to the IRS appropriately, will result in the failure of the exchange and the loss of the tax benefits.

3. Broken chain of custody

One of the principal responsibilities of the QI is to properly manage the proceeds of the sale of the relinquished property and to convey them appropriately to the seller of the replacement property. It’s critical that the funds in question are not commingled with any other funds, nor that the taxpayer ever has personal control over the funds, even temporarily. Tapping exchange proceeds for unauthorized uses, including temporary loans, negates the validity of the exchange.

In the same way, permitting the taxpayer to take personal control over the funds, by parking them in a personal checking account or otherwise accessing them, causes constructive receipt issues that negate the eligibility of the exchange.

4. Disqualified replacement assets

It’s important to remember that 1031 exchanges are also known as like-kind exchanges, and the IRS is meticulous about what constitutes an eligible asset for a like-kind exchange. IRS guidance holds, for example, that both the relinquished and replacement properties must be used in a trade or business, or for investment, which rules out any property used primarily for personal use, like a residence or a vacation or second home.

In addition, both properties need to be similar enough to qualify as “like kind,” meaning both properties need to be of the same nature, character or class — quality or grade does not matter.

The IRS notes that most real estate will be considered like kind to other real estate, but also mentions two specific exceptions:

• Real estate within the U.S. is not like kind to real estate outside the U.S.
• Improvements that are conveyed without land are not like kind to land

Most 1031 exchanges are, for all these reasons, relatively simple and straightforward, and most experienced QIs will counsel their clients not to get too creative in structuring a 1031 exchange. It’s certainly possible to tailor an exchange to meet the needs of the exchanger, but in trying to avoid faults that would disqualify a like-kind exchange, the old rule of thumb is that simplicity tends to win the day, particularly when the 180-day margin for error is so inflexible.

5. Value mismatch

Recall that a 1031 exchange needs to meet one of three criteria to fully qualify for deferral of the capital gains taxes on the original sale:

• The fair market value of the replacement property (or properties) must be equal to or greater than the sale price of the relinquished property (up to a limit of three replacement properties).
• If more than three replacement properties are involved, then the sum of the fair market value of all the replacement properties cannot exceed 200% of the sale price of the relinquished property. If it does exceed 200%, then the exchange is disqualified. Unless…
• A 1031 exchange which involves four or more replacement properties, and which violates the 200% rule above, is nevertheless permissible if the exchanger successfully acquires 95% of the properties on their list of identified replacements.

Failure to meet these standards will not invalidate the entire exchange but will subject the difference in the values (also known as “boot”) to a tax that, depending on variables, could be at the taxpayer’s ordinary income tax rate. Granted, even in this scenario, a partial deferral of capital gains tax is better than none at all, but since the goal of a 1031 exchange is to defer the maximum amount, it’s important to follow IRS guidance to the letter.

6. Debt mismatch

In many (if not most) 1031 exchanges, one or more of the properties involved in the exchange come with debt, usually in the form of an existing mortgage. There’s nothing wrong with that, of course, but while properties with debt are eligible for participation in a 1031 exchange, the value of the debt does have to be accounted for.

Many investors, and more than a small number of inexperienced tax advisers, believe (incorrectly) that the debt of a replacement property needs to be equal to or greater than the debt on the relinquished property. That’s certainly one way to address the value of the debt on the relinquished property, but not the only one! In fact, the value of the debt can be replaced:

• By a new loan on the replacement property
• By an infusion of cash that the exchanger has available (separate from the proceeds of the original sale)
• By a seller carryback note, in which the replacement property’s seller agrees to help finance the purchase through a note that the exchanger pays back on an agreed-upon schedule
• Some combination of the three

In these cases, as in all 1031 exchanges, the assistance of an experienced, capable QI is essential to minimize the possibility of “mortgage boot,” which would weaken the tax benefits inherent to the exchange.

7. Undiscovered title or use defects

As discussed, like-kind exchanges require the eligibility of all assets involved, and its incumbent on the exchanger and their team to do effective due diligence on the replacement assets in a timely manner. If previously unknown property defects are unearthed on identified replacement assets past the 45-day deadline, it would certainly threaten the validity of the exchange. Finding current or recent-past owner usage of the identified replacement property as a vacation residence or for other personal uses also sabotages eligibility.

The limitations on an asset’s personal use are strict, and by and large, properties must adhere to being used only for investment purposes. Impermissible prior tenant usage or prohibited conditions uncovered in inspections can also undermine closing qualification.

Finding alternative qualifying properties with remaining funds typically proves impossible this late in the process and can easily doom the transaction and trigger large tax bills.

8. Utilizing exchange funds for other purchases

If any part of intermediary-held exchange funds gets diverted toward an unauthorized purchase unrelated to completing the specific exchange transaction, immediate disqualification of the exchange results. Unexpected shortfalls might tempt inexperienced intermediaries to indulge in such impermissible diversions, sabotaging the validity of the exchange.

Along the same lines, it sometimes happens that final proceeds from the sale of the relinquished property leave inadequate funds for acquiring the previously identified replacement, and the exchange can implode, with immediate tax payments often unexpectedly due.

An experienced and knowledgeable financial team is able to foresee circumstances such as these and can be counted on to ensure the availability of adequate funds for legitimate exchange needs throughout the process.

9. Simplification is your friend

It can’t be stated enough: Even with an experienced intermediary at the helm, the simpler and more straightforward a proposed 1031 exchange is, the higher the odds of its success. Savvy intermediaries and their teams know how to avoid some of the more common examples of “overengineering” an exchange.

Some examples are:

• Trying to include additional replacement properties separately from the initial exchange without the proper identification process (or outside of the 45-day window)
• Excessively changing the parameters on an already-identified replacement property, such as the number of units in a housing development, square footage of the property in question or acreage of the identified lot
• Closing processes that are overly encumbered with contingencies, triggers or other significant strings attached that can jeopardize the timing of the transaction

10. Don’t forget your friends at the state level

While federal 1031 exchange rules may govern these transactions, some state tax authorities impose added limitations, procedural hurdles or other such requirements at local levels. (A handful of states have clawback rules that govern the eventual sale of the replacement property, for example, and the state of Pennsylvania didn’t even recognize 1031 exchanges for state tax purposes until 2023.)

These additional state-level factors are constantly evolving and may trip up unwary investors and intermediaries whose focus is exclusively on federal compliance. Significant liability arises if state-specific policies get ignored, and it’s imperative that investors and their advisers are fully aware of these pitfalls.

The bottom line

None of the above risk factors is grounds to simply roll your eyes and pay Uncle Sam a capital gains tax that can be deferred with the right process, of course. They are simply some of the more common traps to be aware of as you undertake the process, and especially as you consider who you want to work with on your financial team.

Be sure that your advisers are experienced, knowledgeable and focused on every detail of the transaction, and all of the horror stories we've reviewed here will be nothing more than cautionary tales.

Done correctly, a 1031 exchange is a smart and safe way to put more money in your pocket and effectively assist in the substantial growth of your assets.

Related Content

• What Is Capital Gains Tax Deferral?
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Are Capital Gains Taxes Keeping You From Selling Property?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For instance, you probably heard that the retail giant started selling gold bars online, generating a frenzy among investors and casual shoppers. (Costco reported over $100 million in gold bar sales in a single quarter a year ago.)

However, those gold bars have tax implications that might catch buyers off guard. And it’s not just about gold. When it comes to taxes, the IRS casts a wide net in terms of what counts as a collectible.

That matters because collectibles are subject to special tax rules. Essentially, you’ll pay a higher capital gains rate when you sell them.

So, let’s dive into how the IRS treats your treasures, from gold to art, coins, and more.

What qualifies as a collectible?

Treasury and the IRS have a comprehensive definition of collectibles, But essentially, "collectibles" include but are not limited to:

• Works of art
• Rugs and antiques
• Metals and gems (any, but e.g., gold, silver, platinum, palladium)
• Stamps and coins
• Alcoholic beverages (any but for example, fine wines, rare whiskeys, vintage champagnes, craft beers, limited edition spirits)

Note: Additionally, the IRS reserves the right to classify any other tangible personal property as a collectible for tax purposes. And there are some limited exceptions for certain metals, gems, and coins.

Understanding whether an item qualifies as a collectible is key since the classification affects the applicable tax rate on capital gains from its sale.

But keep in mind that not all items that seem like collectibles are taxed as such. For instance:

• Certain precious metals and coins may be exempt if they meet specific criteria (limited exception).
• Despite their collectible nature in the market, the IRS doesn't currently classify digital assets such as NFTs as collectibles.

It's also worth noting that precious metal ETFs are treated as collectibles for tax purposes.

Collectible capital gains tax rate

Essentially, if you sell your collectible for a profit, you will face capital gains tax. As you would expect, the amount you'll owe depends on how long you've held onto the item.

For short-term holdings of one year or less, any profit is taxed as ordinary income at your marginal federal tax rate.

Long-term gains, on the other hand, are treated differently.

• If you've held the collectible for over a year, you'll be subject to a maximum tax rate of 28%.
• This rate is higher than the typical long-term capital gains tax rates of 15% or 20%.

Why the higher rate? The federal government basically wants to discourage speculation in potentially volatile markets and encourage investments that contribute more directly to economic growth.

Also, while the maximum 28% rate for long-term collectible gains exceeds rates for other assets, it's still lower than short-term rates taxed as ordinary income.

Calculating tax on collectibles

Determining your tax liability on a collectible sale involves a few steps. First, you need to establish your basis in the item.

• For purchased collectibles, like those Costco gold bars, for example, your basis is generally the original cost plus any associated fees, e.g., costs for restoration (for hobbyists), expenses for specialized storage (e.g., climate-controlled facilities for art), or fees paid to brokers or dealers.
• If you inherited the collectible, your basis would be its fair market value at the time of inheritance.

Once you've determined your basis, subtract it from the sale price to find your capital gain. This gain is then subject to the appropriate tax rate based on your holding period and income level.

To report sales for collectibles, use Form 8949. That information is used on Schedule D of Form 1040 to calculate and report your overall gains or losses.

Can the marginal rate on collectibles exceed 28%?

The effective tax rate on collectible gains can sometimes exceed 28% due to several factors.

Net investment income tax (NIIT): Depending on your adjusted gross income, you might face a 3.8% net investment income tax on your gains.

The NIIT is an additional tax on investment income for those with income exceeding specific thresholds ($200,000 for single filers and $250,000 for married couples filing jointly).

For more information, see What is Net Investment Income Tax?

AMT: If you are subject to the Alternative Minimum Tax (AMT), the effective tax rate could increase as well.

State and local taxes can also contribute to a higher overall tax burden when it comes to gains on collectibles.

So, consider these potential variables when assessing the tax implications of selling your collectibles.

Tax on collectibles: Bottom line

Understanding how collectibles are taxed is key to making informed investment decisions and effectively managing your tax liability. And as the collectibles market grows, staying informed about these tax implications is increasingly important.

To manage your tax burden when selling collectibles, consider spreading your sales over multiple years to distribute your taxable gains. Also, keep detailed records of all costs associated with acquiring and maintaining your collectibles.

Doing so and consulting with a trusted tax professional or financial planner to determine strategies that are right for you, can help potentially reduce your taxable gain.

Related

• Capital Gains Tax Rates for 2024 and 2025
• What is the Net Investment Income Tax (NIIT)?
• Millions More Could Have to Face the AMT
• Capital Gains Tax Explained

Before you start packing your bags, there's a pesky little thing called capital gains tax that might put a damper on your plans and will certainly reduce the “take home” amount of your profit.

To address this thorny issue, let’s dive into the world of capital gains tax deferral — a powerful strategy that can help you keep more of your hard-earned profits and potentially supercharge your real estate investment portfolio. So, grab a cup of coffee, get comfortable, and let's explore how you can make Uncle Sam wait his turn while you continue building your real estate empire.

The ABCs of capital gains: A quick refresher

Before we jump into the nitty-gritty of deferral strategies, let's make sure we're all on the same page about what capital gains actually are.

Simply put, capital gains are the profits you make when you sell a capital asset — like real estate or stocks — for more than you paid for it. Let's say you bought a charming little duplex in an up-and-coming neighborhood for $200,000 five years ago. You've been a diligent landlord, and now the area is booming. You decide to sell, and voilà! You get $300,000 for your property. That $100,000 difference is your capital gain.

Now, the taxman cometh, and he's particularly interested in two things: how long you owned the asset and how much profit you made when you sold it.

Long-term vs short-term capital gains: A tale of two taxes

The IRS has decided that not all capital gains are created equal. It splits them into two categories:

• Short-term capital gains. These apply to assets you've owned for less than a year. They're taxed at your ordinary income tax rate, which can be as high as 37% for high earners.
• Long-term capital gains. These are gains on assets you've held for more than a year. The tax rates are generally lower, ranging from 0% to 20%, depending on your income and filing status.

Let's look at an example: Meet Sarah, a successful software engineer who's dipping her toes into real estate investing. She bought a small condo in Austin for $150,000 and sold it 11 months later for $200,000, making a $50,000 profit. Because she held it for less than a year, that $50,000 is taxed as a short-term capital gain. If Sarah's in the 24% tax bracket, she'll owe $12,000 in taxes on her gain.

But if Sarah had held on to the condo for just one more month, her $50,000 gain would have been a long-term capital gain. Assuming she falls into the 15% long-term capital gains tax bracket, she'd owe only $7,500 in taxes. That's a $4,500 difference just for holding on a little longer.

Enter the hero: Capital gains tax deferral

Now that we understand the basics, let's talk about the star of our show: capital gains tax deferral.

Capital gains tax deferral is like hitting the pause button on your tax bill. Instead of paying taxes on your profits right away, you can push that obligation into the future. It's not tax avoidance — which is illegal — but tax deferral — which is perfectly legit and even encouraged in some cases.

Why would you want to defer your capital gains? Well, there are a few compelling reasons:

• Keep more money working for you. Instead of sending a chunk of your profits to the IRS, you can reinvest that money and potentially earn even more.
• Take advantage of lower tax rates later. If you expect to be in a lower tax bracket in the future, deferring your gains could mean paying less in taxes overall.
• Leverage the time value of money. A dollar today is worth more than a dollar tomorrow, so postponing your tax bill can be financially advantageous.

There are several ways to defer capital gains taxes in any given year. Some investors choose to offset capital gains with capital losses incurred elsewhere in their investment portfolio; end-of-year selling of certain investments is even predicated on the idea of "harvesting" stock losses with offsetting of gains in mind.

Other investors choose to maximize their sales in years when they know their income, for one reason or another, will be substantially lower than usual; the additional income from capital gains will therefore present a lesser burden than usual. As with any tax strategy, it's wise to consult with a CPA or other tax professional to make sure your math will match up with the IRS'.

While those strategies require specific circumstances that may or may not apply to all taxpayers, let's explore three popular strategies for deferring capital gains in real estate that are accessible to anyone: 1031 exchanges, Delaware statutory trusts (DSTs) and qualified opportunity zones (QOZs).

1031 exchanges: How to build a real estate portfolio

Named after Section 1031 of the Internal Revenue Code, a 1031 exchange is like a magic trick for real estate investors. It allows you to sell an investment property and use the proceeds to buy a similar property, all while deferring capital gains taxes. It's like trading in your old car for a new one, but with real estate (and much better tax benefits).

Here's how it might work: Let's revisit our friend Sarah. She's now a seasoned real estate investor and owns a small apartment building in Round Rock, Texas, worth $500,000 that she bought for $300,000 several years ago. She's eyeing a larger complex in San Antonio but is hesitant about the potential $200,000 capital gains tax hit.

Enter the 1031 exchange. Sarah sells her current building and immediately rolls the entire $500,000 into the new, larger complex. Voilà! No capital gains tax is due on the $200,000 profit. Sarah has effectively "traded" one property for another, deferring her tax bill and upgrading her investment.

But remember … there are some strict 1031 exchange rules you need to know:

• The replacement property must be "like kind" — generally, any real estate held for investment or business qualifies.
• You must identify potential replacement properties within 45 days of selling your original property.
• You must close on the new property within 180 days.
• You can't touch the money from the sale — it must be held by a qualified intermediary (QI), a third party whose experience and expertise are essential for a successful 1031 exchange.

Miss any of these deadlines, violate any of these rules, and the IRS will be knocking on your door, hand outstretched for those capital gains taxes.

Delaware statutory trusts: Fractional ownership, full tax benefits

If the idea of managing larger properties makes you break out in a cold sweat, or if you're looking to diversify your real estate holdings, a Delaware statutory trust (DST) might be your new best friend.

A DST is a legal entity that allows multiple investors to own fractional interests in large, institutional-quality properties. Think of it as the real estate equivalent of buying shares in a company, but with some nifty tax benefits.

Here's the kicker: In 2004, the IRS ruled that DST interests qualify for 1031 exchanges. This means you can sell your actively managed property, invest in a DST and still defer those capital gains taxes.

Let's see how this might work for our intrepid investor, Sarah: The San Antonio property that she purchased has appreciated nicely, but she's tired of dealing with tenants and maintenance issues. She sells the building for $1 million (with a $500,000 capital gain) and invests the proceeds into a DST that owns a large, Class A office building in Houston.

The benefits for Sarah are numerous:

• She defers paying taxes on her $500,000 gain
• She diversifies her real estate holdings
• She moves from active to passive management, freeing up her time
• She gains access to a type of property she couldn't afford on her own

It's important to note that DSTs come with their own set of pros and cons. They offer professional management and the potential for steady income, but they also lack liquidity and individual investor control. As always, it's crucial to do your due diligence and consult with financial and legal professionals before diving in.

The power of continuous deferral

One of the most powerful aspects of these deferral strategies is the ability to use them repeatedly. Each time you sell and reinvest using a 1031 exchange or DST, you can potentially defer your capital gains taxes again.

Imagine Sarah continues this pattern throughout her investing career, always rolling her profits into new, hopefully appreciating properties. She could potentially build a substantial real estate portfolio while deferring taxes for decades.

And here's the ultimate kicker: If Sarah holds these investments until she passes away, her heirs may receive a "step-up" in basis to the fair market value at the time of her death. This estate planning idea, common enough to merit its own nickname (“swap till you drop”), could potentially eliminate the capital gains tax liability altogether, for Sarah and her heirs.

Qualified opportunity zones: The new kids on the block

While 1031 exchanges are literally a century-old concept, and DSTs have been around in one form or another since the 1980s, there's a new kid in town in the capital gains tax deferral game. The Tax Cuts and Jobs Act introduced qualified opportunity zones (QOZs)to the country in 2017 and, with them, the opportunity to defer one capital gains tax while potentially avoiding a subsequent tax entirely.

Here's how the process works: Mark just sold a property and has $1 million in capital gains. Instead of paying taxes on this gain, he invests the full amount into a qualified opportunity fund (QOF) that's developing properties in a QOZ, an economically distressed community identified by the government as needing investment.

By doing this, Mark pulls off a bit of magic on two fronts:

• He defers paying taxes on his $1 million gain until December 31, 2026 (or when he sells his QOF investment, whichever comes first)
• But if he holds his QOF investment for at least 10 years, the real magic happens: He'll pay zero capital gains tax on any appreciation of his QOF investment

It's like the government is giving you a tax break to help revitalize communities. Talk about a win-win.

Wrapping up: Your action plan

Capital gains deferral strategies like the ones outlined above can be powerful tools in your real estate investing toolkit. They allow you to keep more of your money working for you, potentially increasing your returns over time.

However, these strategies are complex and come with strict rules and potential pitfalls, so it’s absolutely critical to have the right team working with you to oversee your efforts. Before embarking on any capital gains tax deferral strategy:

• Clearly define your investment goals
• Understand the rules and requirements thoroughly
• Consult with qualified tax, legal and financial professionals
• Consider your long-term plans and exit strategies

Remember, the goal isn't just to defer taxes indefinitely — it's to build and preserve wealth in a way that aligns with your financial objectives.

So, the next time you're facing a hefty capital gains tax bill on your real estate investment, don't despair. With careful planning and the right strategy, you might just be able to tell the taxman, "Not today!" and keep your real estate empire growing strong.

Related Content

• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Are Capital Gains Taxes Keeping You From Selling Property?
• 721 Exchange to Defer Taxes: Pros and Cons

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

These changes (which will apply to tax returns you'll normally file in 2026) could have significant implications for taxpayers, particularly those with investment income.

So, let's break down the new numbers.

New 2025 capital gains tax thresholds

For 2025 (returns normally filed in early 2026), the long-term capital gains tax rates remain at 0%, 15%, and 20%, but the income thresholds have shifted.

Remember that short-term capital gains (assets held for one year or less) are taxed at ordinary income tax rates, different from those for long-term capital gains.

For more information on capital gains rates, see Capital Gains Tax Rates for 2024 and 2025.

The new brackets are as follows:

0% Rate:

Single filers: Up to $48,350

Married filing jointly: Up to $96,700

Head of household: Up to $64,750

15% Rate:

Single filers: $48,351 to $533,400

Married filing jointly: $96,701 to $600,050

Head of household: $64,751 to $566,700

20% Rate:

Single filers: Over $533,400

Married filing jointly: Over $600,050

Head of household: Over $566,700

Comparison to 2024 thresholds

Compared to 2024, these numbers reflect about a 2.8% increase across all brackets and filing statuses. It's worth noting that while the percentage increases might not seem significant, they can translate into notable dollar amounts.

For instance, the near 2.8% increase in the 20% rate threshold for married couples filing jointly represents an additional $16,300 of income that can be taxed at the lower 15% rate in 2025 compared to 2024. (2024 threshold: $583,750/2025 threshold: $600,050)

These adjustments also offer a slight advantage for some at the lower end of the bracket thresholds.

For example, married couples filing jointly can now realize up to $2,650 more in capital gains at the 0% rate in 2025 compared to 2024. (2024 threshold: $94,050/2025 threshold: $96,700)

Leveraging the 0% capital gains rate

The new 0% capital gains rate threshold for 2025 creates some opportunities for some investors.

• For example, If your income varies yearly, you might consider realizing long-term capital gains in years when your total taxable income is below the 0% threshold.
• That way, you could take advantage of the lower tax rate.
• Also, depending on your situation, offsetting your capital gains with any losses you may have incurred (tax loss harvesting) could help.

Whatever you do, evaluate all your projected income sources each year, not just capital gains.

Long-term capital gains tax: Bottom line

As Kiplinger has reported, these capital gains tax income threshold adjustments come alongside annual inflation-adjusted changes to the 2025 federal income tax brackets, the standard deduction for 2025, and several other key tax provisions.

The various shifts offer some advantages, like having more income taxed at lower rates, providing some buffer against inflation, and allowing for additional tax planning opportunities in some cases.

But don’t forget state taxes on capital gains, which can impact overall tax liability.

And as always, consult a qualified and trusted tax professional to help manage your capital gains tax liability.

Related

• New 2025 Federal Income Tax Brackets Are Set
• Capital Gains Tax Rates for 2024 and 2025
• New Standard Deduction Change for Those Over 65
• States With Low and No Capital Gains Tax

Let's break down the key aspects of Harris’ proposal of taxing unrealized gains and examine how it could impact investors, businesses and the overall financial landscape.

The basics of Harris's proposed plan targets individuals with a net worth exceeding $100 million — about 10,660 Americans. Yes, that is a small percentage of the population, but thinking it won’t affect you would be a mistake.

The proposed tax would apply to unrealized gains — the increase in value of stock holdings and other assets that haven't been sold. This marks a dramatic shift from our current system, which taxes capital gains only at the point of sale.

The stated goal is to close what some view as a loophole allowing the ultrawealthy to indefinitely defer taxes on appreciating assets. By taxing these paper gains annually, the proposal aims to generate additional federal revenue for social programs and deficit reduction.

However, as we dive deeper, it becomes clear that the potential consequences of such a policy shift could be far-reaching and potentially disruptive to the financial markets.

A potential increase in market volatility

One of the most immediate concerns surrounding this proposal is its potential to significantly increase market volatility. The stock market is highly sensitive to changes in tax policy, and introducing a tax on unrealized gains could create a new layer of uncertainty for investors.

As wealthy individuals adjust their strategies to minimize tax liabilities, we could see more frequent trading and portfolio repositioning. This increased activity could lead to greater price fluctuations, particularly in sectors with more volatile stock prices, like technology and growth-oriented industries.

The need to regularly reassess and report asset values for tax purposes might incentivize short-term trading over long-term holding strategies. This shift could undermine market stability and lead to more unpredictable price swings. We might even see a rush to sell appreciated assets before the tax is implemented, triggering a broad sell-off and creating temporary market disruptions.

Another significant concern is how this tax could impact long-term investment strategies. The prospect of being taxed on paper gains — before those gains are realized — could discourage investors from holding on to appreciating assets for extended periods.

Long-term investment in growth stocks has traditionally been a core wealth-building strategy, particularly for those expecting their investments to appreciate over time. However, if investors face annual taxation on those gains regardless of whether they sell, the incentive to hold for the long term diminishes significantly.

Possible capital flight

The potential for capital flight is a serious concern with Harris' proposal. Wealthy individuals may choose to move their assets to more tax-friendly jurisdictions, reducing liquidity in the U.S. stock market and potentially disrupting the broader investment landscape.

This exodus of capital could have far-reaching consequences. Not only could it reduce the amount of taxable income and unrealized gains that the IRS can capture, but it could also lead to a decrease in domestic investment. This could slow economic growth and job creation, ultimately undermining the very goals the tax aims to achieve.

The valuation challenges are a Pandora's box of complexity. While publicly traded stocks have clear market values that can be easily tracked, other types of assets — such as privately held businesses, real estate or collectibles — are far more difficult to value accurately. Determining the fair market value of non-publicly traded assets is a complex and potentially contentious process that could lead to frequent disputes between taxpayers and the IRS.

For example, wealthy individuals who own private companies would need to provide accurate valuations of their businesses each year. However, these valuations can fluctuate widely depending on market conditions, earnings reports and other factors. The administrative burden of enforcing this system could overwhelm the IRS, which would need to significantly expand its capacity to handle the influx of information and audits.

Taxpayers, particularly those with complex asset portfolios, would face increased reporting requirements, legal costs and administrative burdens to comply with the new rules. This added complexity opens the door to potential tax avoidance strategies, where individuals could underreport the value of their assets or exploit loopholes to minimize their tax liabilities.

Entrepreneurship and innovation could be stifled

From a broader economic perspective, taxing unrealized capital gains could potentially stifle entrepreneurship and innovation. Many of the wealthiest individuals in the U.S. are founders of technology companies or early-stage investors who have built substantial fortunes by investing in high-growth sectors. These individuals often rely on the appreciation of their stock holdings to fund future ventures, create jobs and drive innovation.

A tax on unrealized gains could reduce the incentive for these individuals to invest in new ventures or take on the risks associated with entrepreneurship. This could slow economic growth by discouraging investment in the very sectors that drive innovation and job creation.

Small businesses, in particular, could struggle to attract investment under the new tax regime. Investors may become more cautious about putting money into startups or early-stage companies that take years to generate returns. Without a steady flow of investment into new businesses and technologies, economic dynamism could decline, leading to slower growth and reduced productivity gains over time.

The implementation of a tax on unrealized capital gains is likely to face significant legal and constitutional challenges. Until the courts resolve legal challenges, investors and businesses may be hesitant to make long-term decisions, leading to stagnation in certain sectors and a broader slowdown in economic activity.

While the full impact of taxing unrealized capital gains remains to be seen, it's clear that such a policy shift could have far-reaching implications for investors, businesses and the economy as a whole.

What you can do

For high-net-worth individuals who may be affected by this proposal, it's crucial to work closely with financial advisers and tax professionals to develop strategies that minimize potential tax liabilities while still aligning with long-term financial goals. This might involve diversifying portfolios, exploring alternative investment vehicles or considering philanthropic strategies that could help offset potential tax burdens.

You could also consider shifting out of capital gain positions and reallocating into tax-favorable options. You could consider a mega Roth to take advantage of catch-up provisions or a specially designed life insurance policy, since these contracts currently do not have limits on how much you can invest and are strategies that are easy to execute.

For the broader investing public, it's important to stay informed about these policy developments and understand how they might impact the overall market landscape. Diversification remains a key strategy for managing risk, and investors should be prepared for potentially increased market volatility.

Indeed, Harris' proposal to tax unrealized capital gains represents a significant shift in U.S. tax policy that could reshape the investment landscape as we know it. While the tax aims to address income inequality by targeting the wealthiest individuals, it also raises legitimate concerns about market volatility, reduced investment, capital flight, valuation challenges and economic growth.

Ultimately, the impact of taxing unrealized capital gains will depend on how it is implemented and how investors respond to the new tax environment.

By working with an experienced team of professionals, staying informed and focusing on your long-term financial goals, you can help yourself prepare for whatever changes may come in the tax and investment landscape.

If you want more information, you can visit www.SkrobonjaFinancialgroup.com.

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• Unrealized Gains Tax: One Important Thing You Need to Know
• A Look at Kamala Harris's Tax Plans Ahead of the Election
• A Look at Donald Trump's Tax Plans Ahead of the Election
• Are You Prepared for the Evolution of Retirement?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Her proposal would also raise the net investment income tax (NIIT) from 3.8% to 5%. Under current law, the NIIT applies to certain investment earnings once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing together.

The increases would put the all-in federal capital gains tax rate at 33%, the highest since 1978, according to the Tax Foundation. In addition, many states have their own capital gains tax, or they tax capital gains as income, like New York, California and New Jersey. Between the two, state and federal, high-income earners with unrealized capital gains may be looking at a significant tax bite.

Of course, Harris’ tax plan would need congressional approval, which could prove difficult. Still, if you think you might be impacted by a higher capital gains tax, here are five ways we are helping our clients minimize the long-term capital gains tax:

1. Aggressive tax-loss harvesting

A time-tested way to minimize the capital gains tax is through tax-loss harvesting. Tax-loss harvesting is selling a stock, bond or mutual fund at a loss, then using that loss to offset a gain on some other position in your portfolio. You can buy back that position you sold for a loss after 30 days to avoid the wash-sale rule or purchase a like-kind security. The IRS allows investors to carry forward unused losses on your federal tax return indefinitely (state rules vary).

In practice, I find many individuals wait till the end of the year to do tax-loss harvesting, or don’t do it all. That is a wasted opportunity. The investment programs we use can harvest losses daily, sometimes weekly. The idea is a simple one, but powerful, when done correctly.

We have had clients exit positions with large unrealized capital gains, but pay very little in federal capital gains taxes simply because they banked several years of losses over time.

Be sure to use a top-rated investment program for your tax-loss harvesting — it is a technology-intensive endeavor, and not all providers are created equal.

2. Get even more aggressive with tax-loss harvesting

Tax-loss harvesting doesn’t have to happen only in bad years when stocks go down, but it can be done in good years, too. In his Journal of Investments and Wealth Monitor whitepaper The Long and Short of It, Hoon Kim of Quantinno Capital, a leader in long/short tax-loss harvesting, explains how a considerably more amount of losses can be generated from a portfolio using a long and short stock strategy vs long only.

His approach is to add an extension to an existing portfolio by borrowing against it and going long and short with a new basket of securities. This gives Kim the ability to harvest losses in good years and bad years of the stock market. (Going “long” in stocks means profiting when they go up, and “shorting” is profiting when the underlying stock goes down.) In some years, the losses generated were almost twice as much as a traditional long-only tax-loss harvesting strategy.

3. Capital gains harvesting

Capital gains harvesting is selling your winners now to take advantage of a lower capital gains rate. There are two ways to go about this. One way is to wait for your income to be lower, say, in retirement or if you are unemployed. If that’s the case, then your long-term capital gains rate could be lower as well.

Or you can choose to sell your winners now and pay the capital gains tax at current rates. If you truly think rates are going up and you want to hedge yourself, taking some chips off the table is a reasonable idea. Either way, it pays to know the capital gains tax rate and plan accordingly.

4. Spread the payment over several years

If ripping the Band-Aid off and selling all at once is too painful, a staged sale can help. A staged sale is agreeing to sell a predetermined amount each year. This can help in two ways:

• You spread your capital gains tax liability over multiple years instead of paying it all at once, which may be costly.
• If your income fluctuates, you suffer a job loss, or something else happens that puts you in a lower tax bracket, you may pay a lower longer-term capital gains tax. Be aware, you are taking a gamble by delaying — what has gone up in price, may go down, too.

5. Donate to charity

If you are charitably inclined, then consider donating appreciated stock. When you gift an appreciated stock to a charity, you can gift the stock without incurring a tax. I usually see this with clients who have a large gain in a single stock. They might be unwilling to sell the stock due to the capital gains tax. But holding a large quantity of any single stock can be risky. And if you are already gifting to charities with cash, then why not give some of the stock?

There are a few ways to gift stock. You might be able to gift directly to the charity, but I like to use a donor-advised fund, which is a great way to facilitate your giving and help with recordkeeping, a big plus come tax-filing time.

If you’re in retirement, you may use a charitable remainder trust (CRT). Here, you gift appreciated stock to the trust and avoid the capital gains tax. The trust pays you an annuity — an annual income stream for a certain number of years. The remaining assets go to the charity.

There are other ways to minimize the long-term capital gains tax. An older investor may very well hold the appreciated stock until death to take advantage of the step-up in basis (certain rules apply). This works, too — so long as Congress or the next administration doesn’t change the rules.

Or, if you plan on moving to a more tax-friendly state for retirement, maybe consider waiting to sell till after you move. Of course, you could lose money in the position while waiting, or the state could change its tax laws.

As you can see, there are many ways to reduce or eliminate a long-term capital gains tax. But what makes sense for you really depends on your situation. Consider starting with a financial plan. A financial plan is a great way to look at things in totality and help you carefully evaluate your options.

You can schedule a complimentary capital gains tax review with me here.

Michael Aloi, CFP, is an independent financial adviser with 25 years of experience in helping clients achieve their financial goals. He works with clients throughout the United States. For more information, please visit www.michaelaloi.com.

Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666.

This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results.

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• A Look at Kamala Harris's Tax Plans Ahead of the Election
• A Look at Donald Trump's Tax Plans Ahead of the Election
• Got a Hot Rate on a Money Market Account? Think Again
• One Retiree's Story of How She Built Her Retirement Nest Egg

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Let's talk about the federal taxation of capital gains, in light of the results of the elections and the post-2025 expiration of many provisions in the 2017 Tax Cuts and Jobs Act.

Taxation of long-term capital gains

Long-term capital gains of individuals are taxed at favorable rates. Profits from the sale or exchange of capital assets held for more than a year are generally subject to capital gains tax rates of 0%, 15% or 20%.

The rates are based on income thresholds that are adjusted annually for inflation. For 2024, the 0% rate applies to taxpayers with taxable income up to $47,025 on single returns, $63,000 on head-of-household returns and $94,050 on joint returns. The 20% rate begins at $518,901 on single returns, $551,351 on head-of-household returns and $583,751 on joint returns. The 15% rate applies to filers with taxable incomes between the 0% and 20% break point.

Before 2018, long-term capital gains tax rates were based on your federal income tax bracket. The 0% rate applied to people in the 10% or 15% income tax brackets; the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for filers in the other tax brackets. The pre-2018 capital gains tax rules are slated to return after 2025, unless Congress acts.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates, some do have higher rates. For example, long-term profits on the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. And depreciation recapture from the sale of depreciated real estate is taxed at as much as 25%.

There's also the 3.8% tax on net investment income (the NII tax). The NII tax applies to single filers with modified adjusted gross incomes (AGIs) over $200,000, joint filers with modified AGIs over $250,000, and married people filing separately with modified AGIs above $125,000. The 3.8% NII tax is due on the smaller of NII or the excess of modified adjusted gross income over these set amounts.

NII includes what is commonly thought of as investment income: Dividends, capital gains, taxable interest, annuities, royalties and passive rental income. Trade or business income derived through a passive activity is also NII, provided that the business income isn’t otherwise subject to self-employment tax.

Donald Trump's position on capital gains tax

Trump has repeatedly said he wants to make the tax cuts in his 2017 tax law permanent and take it further with even lower federal income tax rates for individuals. Trump hasn't said what else he proposes to do with long-term capital gains tax. At one time during his presidency, he floated the idea of a temporary capital-gains tax holiday, but that concept went nowhere.

Project 2025 might provide some insights into what Trump is envisioning for capital gains taxes. This policy blueprint, which was designed for the next Republican administration and spearheaded by the conservative-leaning Heritage Foundation, suggests two changes to the capital gains tax.

First, Project 2025 calls for a 15% top long-term capital gains tax rate, down from 20% now. The last time the U.S. saw a top 15% capital gains tax rate was in 1941.

Second, Project 2025 supports the idea of indexing capital gains for inflation each year. Essentially, if this concept was enacted, taxpayers would be able to increase their tax basis in capital assets by the rate of inflation between the purchase date and time of sale.

Here's a simple example of how capital-gains indexing would work: Say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent inflation indexing, you would have a $25,000 long-term capital gain ($35,000 - $10,000). With indexing, using the Chained CPI-U inflation measure, your tax basis in the stock would jump to $13,740, making your capital gain $21,260 ($35,000 - $13,740), thus lowering your tax bill.

Indexing capital gains for inflation may sound simple, but it's not. There are lots of complexities involved:

• Choosing the appropriate inflation index
• Tax basis isn't always static for investments that you hold (think reinvested dividends), so the calculation to adjust for inflation can get tricky
• It would benefit mainly higher-income individuals

Trump was all over the map on capital gains indexing during his presidency. He first touted the idea and then nixed it. Larry Kudlow, Trump's director of the White House's National Economic Council, is a longtime supporter of capital gains indexing, as are powerful conservative free-market lobbying groups.

Kamala Harris's position on capital gains tax

For the sake of comparison: Harris proposed increasing the top long-term capital gains rate to 28%, up from 20% now. Harris's capital gains tax proposal would apply only to the extent that a taxpayer's taxable income exceeds $1 million.

For example, take a married couple who reports $1,400,000 in taxable income on their joint federal tax return, $500,000 of which is long-term capital gain. Under Harris's proposal, $400,000 of the capital gain would be taxed at 28%, and $100,000 would be taxed at 20%. The last time the federal long-term capital gains tax rate reached 28% was in the late 1990s.

Also for the sake of comparison, Joe Biden had an idea to tax unrealized capital gains at death. This idea would treat death as a realization event for federal income tax purposes, essentially a deemed taxable sale of the decedent's capital assets at fair market value, with capital gains and losses reported on the decedent's final individual income tax return. Gifts would also be treated as a realization event for income tax purposes.

There were lots of exceptions and limits to this proposal, including a $5 million lifetime gain exclusion. This regime was meant to act as a backstop to the proposed higher capital gains tax rate, so that taxpayers subject to high tax rates while alive wouldn't gift assets or hold assets until death to escape tax.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe

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• Harris or Trump: Whose Tax Plans Are More Popular With Voters?
• Capital Gains Tax Explained: What It Is and How Much You Pay

Nevertheless, let’s examine how a Harris or Trump presidency could shape these important investment vehicles based on their past actions, statements and policy positions and with the assumption that their future plans will be in line with their past positions.

Trump on qualified opportunity zones

This one is pretty easy to figure out, as the qualified opportunity zone program was created under the Trump administration as part of the 2017 Tax Cuts and Jobs Act (TCJA). Former President Trump has consistently touted the program as a success story of his presidency. In a 2020 speech at the World Economic Forum, Trump proclaimed, “We created nearly 9,000 opportunity zones in distressed communities where capital gains on long-term investments are now taxed at zero, and tremendous wealth is pouring into areas that for a hundred years saw nothing.”

If re-elected, Trump would likely:

• Maintain or expand the current qualified opportunity zones program
• Potentially extend the tax benefits beyond their current expiration dates
• Resist calls for increased oversight or restrictions on the program

However, it's important to note that even under Trump, there were some bipartisan efforts to reform aspects of the QOZ program. In 2019, Senators Tim Scott (R-SC) and Cory Booker (D-NJ) introduced legislation to increase reporting requirements for opportunity funds. A second Trump administration might be open to some modest reforms while keeping the core program intact.

Trump on 1031 exchanges

As a former real estate developer, Trump has long been familiar with 1031 exchanges and has historically been supportive of the provision. During his first term, his administration successfully defended 1031 exchanges from elimination during tax reform negotiations.

Political observers may also recall Trump’s "I love depreciation" observation from his October 2016 debate with Hillary Clinton, referring to various real estate tax benefits, including 1031 exchanges.

If re-elected, Trump would likely:

• Maintain the current 1031 exchange rules without significant changes
• Potentially explore ways to expand the use of 1031 exchanges, such as allowing them for a broader range of asset classes (though it should be noted that the TCJA actually eliminated multiple assets from eligibility for 1031 exchanges in 2017)
• Resist any efforts to limit or eliminate the provision

Harris on qualified opportunity zones

Vice President Harris has had a complex relationship with qualified opportunity zones. While she has supported the general concept of driving investment into underserved communities, she has also been critical of how the program has been implemented.

While she has backed off an original pledge to repeal the TCJA in its entirety, Sen. Harris did support the 2019 Opportunity Zone Reporting and Reform Act, which aimed to increase transparency and prevent abuse of the QOZ program. This legislation would have required more detailed reporting from QOZ funds and tightened restrictions on which areas could qualify as opportunity zones.

"We need to make sure these tax incentives are actually benefiting the communities they're supposed to help, not just wealthy investors," Harris stated when introducing the bill.

If elected president, Harris would likely push for reforms to the QOZ program rather than its outright elimination, especially given the program’s bipartisan appeal. Her focus might nevertheless include:

• Enhanced reporting requirements for QOZ funds
• Stricter criteria for designating opportunity zones
• Measures to ensure more direct benefits to zone residents, such as job creation requirements
• Possible limitations on real estate investments in favor of operating businesses

Harris on 1031 exchanges

Harris has been less vocal about 1031 exchanges specifically, but her broader tax policy positions provide clues to her potential approach. As part of President Biden's campaign, she supported plans to eliminate 1031 exchanges for investors with annual incomes over $400,000.

While not mentioning 1031 exchanges directly, she has indicated an interest in closing tax loopholes that she and other Democrats say primarily benefit the rich and large corporations. This sentiment aligns with the Biden administration's proposal to limit their use.

As president, Harris might pursue:

• Income caps on 1031 exchange eligibility
• Restrictions on the types of properties eligible for exchanges
• Limitations on the amount of capital gains that can be deferred

It's worth noting the complete elimination of 1031 exchanges is highly unlikely, given their long history and broad support in the real estate industry. However, significant modifications could be on the table, depending, as always, on congressional support.

Comparing approaches

The contrast between Harris and Trump on these issues is stark, reflecting their differing economic philosophies and constituent bases.

Harris, in line with broader Democratic Party policies, would likely seek to tighten regulations and close what she sees as tax loopholes benefiting primarily wealthy investors. Her approach to both QOZs and 1031 exchanges would probably involve more government oversight, stricter qualification criteria and potential limitations based on income or investment size.

Trump, on the other hand, would likely maintain or expand both programs, viewing them as successful tools for economic growth and job creation. His approach would probably involve less government intervention and broader eligibility, with a focus on attracting more capital to these investment vehicles.

Potential market impacts

The election outcome could have significant implications for real estate markets and investment strategies:

• Under Harris, we might see a short-term surge in 1031 exchange activity as investors rush to complete deals before any new restrictions are implemented. Long term, there could be a cooling effect on certain segments of the commercial real estate market if 1031 benefits are curtailed.
• With Trump, the real estate market might see continued or increased use of both QOZs and 1031 exchanges, potentially driving up property values in opportunity zones and maintaining the current velocity of tax-deferred property exchanges.
• Harris' potential reforms to the QOZ program could lead to a shift in investment patterns, possibly favoring operating businesses over real estate projects in opportunity zones.
• Trump's approach might encourage more long-term holds in opportunity zones as investors seek to maximize the program's capital gains exclusion benefit.

It’s important to bear in mind, though, that November’s election also places control of both the Senate and the House in play. With both houses of Congress featuring extremely narrow margins for the controlling party, and 33 Senate and all 435 House seats up for grabs in November, it's impossible to predict which party will be in control of either the executive or legislative branches. Nevertheless, neither presidential candidate will find their ideas gaining much traction if the opposition party controls one or both houses of Congress.

Conclusion

While both candidates profess a desire to spur economic growth and job creation, their approaches to QOZs and 1031 exchanges differ significantly. Harris leans toward reform and restriction, while Trump favors maintenance or expansion of these programs.

Investors and real estate professionals should closely monitor the election and its aftermath, as the outcome could necessitate significant strategy adjustments. Regardless of who wins, it's clear that both QOZs and 1031 exchanges will remain hot topics in the ongoing debate over tax policy and economic development.

As always, investors should consult with qualified tax and legal professionals when making decisions about these complex investment strategies. The political landscape can shift quickly, and it's a good idea to stay informed about potential policy changes that could impact your investment portfolio.

Related Content

• A Look at Donald Trump's Tax Plans Ahead of the Election
• A Look at Kamala Harris's Tax Plans Ahead of the Election
• 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
• 11 Reasons to Consider a 1031 Exchange
• Opportunity Zone Investing Still Hot Despite Looming Sunset

Maybe you're considering selling a stock you've held for many years or downsizing your longtime family home. Though seemingly straightforward for some, these kinds of decisions can have significant tax implications. 

In addition to the personal and potentially emotional aspects of those and similar financial moves, capital gains tax can help preserve or unexpectedly reduce your retirement nest egg. Here’s more of what you need to know.

Capital gains considerations in retirement

Capital gains can intersect with everything from tax brackets, Social Security benefits, and Medicare premiums to required minimum distributions (RMDs) and home sales. (There are also state capital gains taxes to think about.)

So, appreciating the connections can help you optimize your retirement tax strategies. Let's consider each of these areas.

Tax brackets

Some retirees end up in a lower federal income tax bracket, which can be helpful when it comes to capital gains. 

However, it should be noted that being in a lower bracket in retirement may not be as common as you might expect. Some retirees will end up in the same or higher bracket in retirement due to multiple income sources, fewer tax deductions, large withdrawals from pre-tax retirement savings accounts, etc.

If you are a retiree in a lower tax bracket than when you were working, you may benefit from those favorable tax brackets while realizing long-term capital gains.

• Single filers with taxable income up to $47,025 can realize long-term capital gains at a 0% rate for 2024.
• Married couples filing jointly can realize gains at 0% up to $94,050 of taxable income.
• The lower tax bracket advantage allows retirees to potentially sell appreciated assets while minimizing tax impact.

Timing asset sales strategically helps you take advantage of retirement years with lower income and realize gains at preferential rates.

Social Security and capital gains

Capital gains can also affect tax on your Social Security benefits. Keep in mind that up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains. 

• The calculation that determines how much of your Social Security benefits are taxable includes realized gains.
• So, significant capital gains in a single year can push more of a retiree's Social Security benefits into taxable territory.

To manage this, consider spreading capital gains realizations over multiple years. Or, you might offset gains with losses through tax-loss harvesting. The goal is to maintain a lower overall taxable income and reduce the impact of taxes on Social Security benefits.

Also, remember that there is no specific age at which you can avoid paying taxes on Social Security benefits. Though proposals are floating around Congress to eliminate federal tax on Social Security, how much of your benefits are subject to tax depends primarily on your “combined income.”

Medicare premiums

Capital gains can also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). High income from capital gains could increase your Medicare Part B and Part D premiums.

• IRMAA is based on modified adjusted gross income (MAGI) from two years prior.
• So, significant capital gains in one year could lead to higher Medicare costs two years later.

Because of this, you should factor in potential IRMAA increases when you plan large asset sales or realize a substantial capital gain. 

Also, strategies like Roth conversions or charitable giving can help you manage your overall taxable income and potentially avoid Medicare premium increases.

Required minimum distributions (RMDs) 

RMDs from traditional retirement accounts add another layer of complexity to capital gains planning. That’s because required minimum distributions are taxed as ordinary income and can push retirees into higher tax brackets. (RMDs are generally required once retirees reach age 73.)

To help mitigate this, you might consider strategies like:

• Realizing capital gains in years with lower RMDs to spread out the tax impact
• Using Qualified Charitable Distributions (QCDs) to satisfy RMD requirements without increasing taxable income
• Exploring Roth conversions in lower-income years to reduce future RMDs

Honorable mention: Capital gains on home sales

Don't forget that the capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. 

So, generally, if you sell your home for a gain of less than those thresholds, you will not be obligated to pay capital gains tax on that amount.

However, as Kiplinger has reported, there are certain criteria you must meet to qualify for the home sale exclusion. There are also several exceptions to the exclusion rules.

It's good to consult a tax professional if you anticipate selling your primary residence at a gain that exceeds the exclusion limit. They should be able to help you identify strategies to mitigate the tax impact.

State capital gains taxes

Don’t forget that state capital gains taxes can also impact retirement finances. However, several states have no state income tax, which means they generally don’t tax capital gains. (Washington state is an exception.)

But, as Kiplinger has reported, keep in mind that states with no income tax aren’t necessarily better for your budget.

• Some states don’t tax retirement income, which can include capital gains from retirement accounts.
• Colorado, for example, allows a retirement income deduction of up to $24,000 for taxpayers 65 and older, which can offset capital gains. (If you’re 55 to 64, you can deduct up to $20,000.)
• Some states have unique capital gains approaches, like Washington’s controversial 7% tax on long-term capital gains exceeding $250,000 in a year.

For more information: See How All 50 States Tax Retirement Income.

Capital gains retirement taxes: What you can do

Whether you’re a recent retiree or still planning, capital gains tax considerations can be key to maximizing your retirement funds. 

So project your income, including RMDs, Social Security benefits, etc. Try to pinpoint years with lower projected income as potential opportunities for realizing capital gains. Also, don’t forget about state taxes when planning where to retire.

Of course, work with trusted financial advisors and tax professionals to develop strategies that fit your situation. With potential changes looming from the Tax Cuts and Jobs Act (TCJA) at the end of 2025, taxes will be center stage following the 2024 election.

Related

• Unrealized Gains: One Important Thing to Know Now
• How the IRS taxes Retirement Income
• Capital Gains Tax Exclusion for Home Sales
• Capital Gains Tax Rates for 2024

Over the years, the use of the 721 exchange as a Delaware statutory trust exit strategy has become increasingly popular among investors for a number of reasons, including the ability to provide tax-deferral benefits, the potential for portfolio diversification, the potential for portfolio income and appreciation and enhanced liquidity.

However, real estate professionals will often cite the words caveat emptor, a Latin phrase meaning buyer beware. This concept, originating from Roman law, emphasizes the buyer's responsibility to thoroughly assess the quality and suitability of a purchase.

This article provides valuable information for investors in order to adopt the caveat emptor mindset when considering 721 exchange UPREITs as part of a 1031 exchange strategy. What does UPREIT stand for? An umbrella partnership real estate investment trust.

Specifically, we will address two important themes regarding the 721 exchange UPREIT:

• First, an overview for how investors can use the 721 exchange UPREIT as an exit strategy for Delaware statutory trust (DST) investments.
• Second, a detailed review of some of the most important items to consider when evaluating various DST offerings and their 721 exchange UPREIT counterparts. These items are often overlooked by investors and the financial firms pitching these products, however they are of utmost importance.

When considering a 721 exchange UPREIT, understanding the DST investment is crucial. However, it is equally, if not more important, to thoroughly understand the REIT in which an investor will ultimately be invested through the 721 exchange.

First, what is a Section 721 exchange?

Section 721 of the Internal Revenue Code states that no gain or loss will be recognized when property is contributed to a partnership in exchange for an interest in the partnership. Specifically, the 721 exchange allows real estate investors to defer capital gains taxes by exchanging their property for operating partnership units (OP units) in the operating partnership of a real estate investment trust (REIT).

So, basically, this provision facilitates a tax-deferred exchange of real estate assets for OP units without triggering immediate tax consequences, providing a potentially strategic exit path for DST investors.

What are the steps to complete a 721 exchange?

The 721 exchange process basically involves three steps:

Step 1: Relinquished property sale. The investor sells their investment property with the intention of executing a 1031 exchange.

Step 2: Property exchange for DST interest. Funds from the 1031 exchange are used to purchase interests in a DST and are held for a period of time.

Step 3: The 721 exchange transaction. Operating partnership (OP) units are issued in exchange for DST interests. Interests in the DST are contributed, on a tax-deferred basis, to the 721 vehicle’s operating partnership in exchange for operating partnership units.

Why are investors selling and entering a 1031 exchange DST with a 721 exchange exit option?

There is no question that being an independent real estate investor has never been more challenging in recent years due to increased market volatility, regulatory onslaught and heightened competition, making it crucial to for investors to have a full landscape plan that includes an ultimate exit strategy. That’s why many investors are increasingly interested in selling their investment properties and 1031 exchanging into Delaware statutory trusts, which have a 721 exchange exit strategy. The potential benefits of this strategy include the following:

Tax advantages. Investors are able to 1031 exchange on a tax-deferred basis into the DST and then are able to 721 exchange on a tax-deferred basis into the operating partnership of the 721 exchange program. Investors also will potentially enjoy tax advantages via depreciation and write-offs to help shelter potential distributions.

Diversification. Many investors incur concentration risk by owning one property in a single market. On the other hand, 721 vehicles tend to own many assets diversified through different markets. The 721 exchange transaction can help diversify an individual’s portfolio, which may reduce concentration risk. As always, diversification does not guarantee profits or guarantee protection against losses. However, it is considered a prudent strategy for investors to consider.

Income potential. Investors can potentially receive income generated through distributions to the holders of the OP units. The 721 exchange vehicle has the goal of increasing income potential to investors over time through new acquisitions and portfolio optimization.

Appreciation potential. Investors can participate in potential appreciation that is realized both at the individual asset level as well as at the enterprise value level. The 721 exchange vehicle can be positioned to take advantage of market opportunities via new acquisitions designed to potentially enhance shareholder value.

Liquidity potential. The 721 exchange vehicle can provide investors with the option of liquidity on a partial or full basis. Investors potentially have the option to liquidate a portion of their shares in combination with their tax-planning strategies. Liquidity may not be a necessity or even a priority for all investors, but having it available offers investors peace of mind. It is important to note that liquidity is not guaranteed and may be limited or discontinued in certain circumstances. Investors are encouraged to read the offering material in full for a complete discussion on the 721 vehicle’s liquidity program.

No further 1031 exchange decisions. Many investors are at a point in their lives where they do not want to have to make another 1031 exchange decision in three to five years, as you would typically have to if you invested in DST offerings without a 721 exchange exit strategy. By participating in a DST with the 721 exchange as a planned exit strategy, investors have peace of mind that as they get further along in years, they and their family members will not be required to make further investment decisions, as they can be in the 721 exchange vehicle indefinitely.

On the flip side, many investors want to have options as to whether they will participate in the 721 exchange or if they will want to do a 1031 exchange at exit. Certain 721 UPREIT DSTs provide this option, while others do not. This is another factor that my firm, Kay Properties, encourages investors to consider as things do change for investors over time — therefore having the option can be vitally important.

Estate planning. Upon death, OP units can be equally split and either held or liquidated by the beneficiaries of the trust. Beneficiaries receive a step-up in basis and can avoid capital gains taxes and depreciation recapture tax. This strategy helps investors plan for the future with the opportunity to transfer wealth to heirs in a tax-efficient manner and allows for individual flexibility when liquidating.

Again, liquidity is not guaranteed and may be limited or discontinued in certain circumstances. Investors must read the offering material in full for a detailed discussion on the 721 vehicle’s liquidity program.

Part two of this series will address the considerations investors might want to look at when evaluating a 1031 exchange into a DST with a 721 exchange exit strategy.

Past performance does not guarantee or indicate the likelihood of future results. Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment. This case study may not be representative of the outcome of past or future offerings. Please speak with your attorney and CPA before considering an investment.

Annualized return is defined as a total return including profit on sale and monthly distributions earned on an annualized basis.

Total return consists of initial return of investor principal, monthly distributions, and profit upon sale.

All return calculations are calculated as if the investor closed on the DST investment at the same time the property was purchased.

Diversification does not guarantee profits or protect against losses. All real estate investments provide no guarantees for cash flow, distributions or appreciation as well as could result in a full loss of invested principal. Please read the entire Private Placement Memorandum (PPM) prior to making an investment.

Please speak with your attorney and CPA before considering an investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods.

Related Content

• Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
• Three Tax-Smart Strategies for Real Estate Investing
• Why Investing in Debt-Free DST Properties Makes Sense Today
• Three Asset Classes Delaware Statutory Trust Investors Should Avoid
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

The move came as the 2024 presidential election campaign gained momentum and economic policies, including Harris’ proposal for several new tax credits, took center stage.

Here’s more of what you need to know.

Related: Harris Policy Platform: Five New Tax Credits to Know

Kamala Harris capital gains tax 

The Vice President has proposed a 28% rate for long-term capital gains for those earning a million dollars or more a year — an increase from the current top capital gains tax rate of 20%.

However, this proposed rate falls short of the nearly 40% rate previously suggested by the Biden administration in Biden’s FY25 budget proposal. 

“We will tax capital gains at a rate that rewards investment in America’s innovators, founders, and small businesses,” Harris said at a campaign rally in New Hampshire.

• Capital gains taxes are levied on profits from selling assets like stocks, mutual funds, and real estate.
• The rate depends on your taxable income and how long you've held the asset.
• However, capital gains tax rates are generally lower than the federal income tax rates for ordinary income like wages.

As Kiplinger has reported, President Biden's capital gains tax plan called for nearly doubling the top rate to 39.6%. When combined with a proposed Net Investment Income Tax increase to 5%, the wealthiest Americans' total rate could have been 44.6%.

Sanders on Kamala Harris rate

What did Bernie Sanders say? Notably, Sen. Bernie Sanders (I-Vt.) told NBC's Meet the Press that he would "go higher than that" referring to Harris' proposed 28% capital gains tax rate for high earners. 

Sanders has previously proposed taxing capital gains at ordinary income tax rates for households earning $250,000 or more a year.

Current capital gains tax

Long-term capital gains tax rates apply to assets held for more than a year. 

Currently, the rates are 0%, 15%, or 20%, depending on your income level; essentially, the higher your income, the higher your rate. 

The income thresholds for long-term capital gains are adjusted annually for inflation. 

Also, the Net Investment Income surtax (NIIT) is currently 3.8%. It applies to individuals, trusts, and estates with certain investment income above specific modified adjusted gross income (MAGI) threshold amounts.

Kamala Harris 'wealth tax'?

Harris says her plan for making the “tax code more fair,” including a so-called “Billionaire Minimum Tax,” is designed to balance raising revenue and maintaining investment incentives. 

President Biden's budget proposal, some of which the Harris campaign has generally supported, includes a Billionaire Minimum Tax for households with a net worth of over $100 million. Biden’s proposed tax rate would be at least 25%, a notable increase for the wealthiest taxpayers, who reportedly pay an average tax rate of about 8.2%, according to the White House.

Note: Such a minimum tax would implicate the controversial idea of taxing unrealized gains. For more information, see Kiplinger’s report Unrealized Gains Tax: One Important Thing to Know Now.

Overall, proponents suggest Harris’ plan could: 

• Generate additional revenue to fund social programs
• Reduce income inequality
• Preserve incentives for long-term investment and entrepreneurship

Critics, however, argue that increasing capital gains tax rates could discourage investment (e.g., some might hold onto assets longer to avoid realizing gains) and potentially hamper economic growth.

Trump on capital gains

Meanwhile, former president and Republican presidential nominee Donald Trump will likely support a 15% reduced capital gains tax rate. That would be a significant cut from the current top rate of 20% for long-term capital gains.

That proposal is also part of a broader conservative tax agenda (some described in Project 2025, from which Trump has tried to distance himself ) that some say would shift U.S. tax policy towards a consumption model.

It's also worth noting that in a September speech before the Economic Club of New York, Trump pledged to reduce the corporate tax rate to 15% (from the current 21%) for companies that make products in the U.S.

Related: Project 2025 Tax Overhaul Blueprint

• Some critics see this potential capital gains tax cut as primarily benefiting high-income earners since most taxpayers already pay 15% or less on their capital gains.
• Some proponents suggest a lower capital gains tax rate could stimulate investment and economic growth.

Capital gains tax rates: Bottom line

Harris' 28% long-term rate proposal adds another dimension to discussions that already include the TCJA tax cliff, Trump's vow to end taxes on Social Security benefits, and both candidates' pledge to eliminate federal tax on tips.

However, whatever side of the political aisle you’re on, it’s good to remember that any changes to the already complicated U.S. tax code would likely face intense lobbying from groups who benefit from the current lower rates. 

Most importantly, implementing a new capital gains tax rate or Billionaire Minimum Tax would require congressional approval, which could be challenging given the current political landscape.

If you're worried about your tax liability, consult a trusted financial advisor or tax planner.

Related Content

• Kamala Harris Golf Tax and Unrealized Gains?
• Capital Gains Tax Rates for 2024
• States With Low and No Capital Gains
• What Trump vs. Harris Might Do With the TCJA Tax Cuts

For example, President Biden's most recent FY25 budget proposal calls for nearly doubling the capital gains tax rate and for taxing unrealized gains, particularly for the ultra-wealthy. And, as Kiplinger has reported, there’s a lot of talk on social media lately about whether Democratic presidential nominee Vice President Kamala Harris will pursue a fictitious “golf tax” or unrealized gains proposals similar to Biden’s. And Mark Cuban, who recently endorsed Harris has weighed in on the issue.

Related: The Truth About Mark Cuban, Kamala Harris, and the Controversial Unrealized Gains Tax

So, it is important to understand what unrealized capital gains are and how they may or may not impact you as a voter and investor. Let’s dive in.

What are unrealized gains?

An unrealized gain occurs when the value of an asset you own increases, but you haven't sold the asset yet. So, the gains are what some call “paper gains” since they haven’t been realized in a tangible way but exist on paper.

For example, if you buy stock for $100 and its value rises to $150, you generally have an unrealized gain of $50. That gain would become "realized" when you actually sell the stock.

However, the most important thing to know now is that under current U.S. tax law, investors are generally taxed on realized gains. So, what’s the issue?

Plan to tax unrealized gains

Since generally only realized gains are taxed in the U.S., some argue that this allows the already ultra-wealthy to accumulate more wealth while avoiding paying their “fair share” of taxes. (For instance, billionaires can typically avoid income taxes by living off loans secured by appreciated assets rather than selling those assets, which would trigger capital gains taxes.)

Related: Kamala Harris Calls for 28% Capital Gains Tax

With that in mind, President Biden proposed a "Billionaire Minimum Tax" that would impose a 25% minimum tax rate on total income for households with over $100 million in assets. The White House has said this would affect only a tiny fraction of taxpayers but could raise significant revenue. (At a campaign rally in New Hampshire, Harris recently expressed support for a Billionaire Minimum Tax, though it's unclear whether her proposal would mirror Biden's.)

Biden also proposed taxing unrealized gains at death. If ever approved (more on that later), this proposal would essentially end the practice of “stepping up” the basis for gains exceeding $5 million for single filers and $10 million per married couple.

Note: Stepped-up basis involves raising the cost basis in appreciated inherited assets to the fair market value at the time of the decedent’s death. Since cost basis helps determine tax amount, stepping up the basis typically minimizes the capital gains taxes owed.

• Under current tax law, these accumulated gains can generally be passed down across generations untaxed.
• The Biden administration says this exacerbates inequality since the practice tends to benefit the wealthy.

Under Biden’s budget proposal, the IRS would tax those gains if the appreciated property isn’t donated to charity. Additionally, the administration has said the change would be designed so that family-owned businesses and farms are not taxed when giving to heirs who continue running the business. Other exceptions would apply involving certain heirs for example.

What happens if unrealized gains are taxed?

Some critics argue that taxing unrealized gains is unfair and could have negative economic consequences. For example, opponents contend that such proposals:

• Tax "paper gains" that may never materialize if asset values decline
• Could force asset sales just to pay taxes, disrupting markets
• Might discourage long-term investment and risk-taking

Other opponents point to the administrative complexity of valuing non-liquid assets every year. And, of course, there are significant legal questions. Are taxes on unrealized gains constitutional?

Earlier this summer, a majority of the U.S. Supreme Court justices upheld a mandatory repatriation tax enacted during the Trump administration that many saw as a “wealth tax.” However, the court left the door open to potentially invalidate future wealth taxes — like a tax on unrealized gains.

For more information on that case, see Kiplinger’s report: Tax on Unrealized Gains Survives Supreme Court.

The Election: Project 2025, Harris unrealized capital gains

The treatment of unrealized gains has become a key point of debate in the current 2024 election cycle. For example, Some Democrats generally support expanding taxation of unrealized gains for the very wealthy. Meanwhile, some Republicans generally oppose these measures, seeing them as unconstitutional or government overreach.

• So, you may have heard that Vice President Kamala Harris’ campaign generally indicated support for President Biden’s FY25 tax proposals. Some of those ideas are broadly outlined in the Democratic Party Platform for 2025, though not yet fully outlined by Harris in her campaign's economic plan.
• At a rally on September 4, Harris called for a 28% capital gains tax rate for those earning one million dollars or more a year.
• Additionally, Project 2025, widely considered a governing blueprint for the next Republican president, proposes a 15% tax on capital gains and dividends.

However, it’s important to remember that any major changes to tax policy would need to pass through the U.S. Congress. Given deep political divisions and the balance of power, it’s hard to see a controversial proposal like taxing unrealized gains gaining bipartisan approval to pass.

Also, for most investors, unrealized gains taxes are not an immediate concern since current theoretical proposals target only the ultra-wealthy. And, as mentioned, the courts would likely weigh in on constitutionality concerns.

Still, since wealth inequality in the U.S. is an issue, debates over plans to tax unrealized gains will likely continue. Social media frenzy may also cause some to worry about a "slippery slope," leading to the broader application of these tax proposals going forward.

Regardless of the election outcome, it’s good to stay informed about current capital gains tax rates and rules, including the capital gains tax exclusion for home sales for example. If tax policy and laws change, consult a financial advisor or tax planner to help optimize your tax strategies.

Related

• Capital Gains Tax Rates for 2024
• Should Taxes on Tips Stay or Go?
• Harris Calls for 28% Capital Gains Tax Rate for Some High Earners
• Project 2025 Tax Overhaul Blueprint

The combined federal and state capital gains tax rates and the lack of a capital gains tax exemption often make the capital gains tax much more costly than the estate taxes for appreciated property. Despite the frequent fact that a trust maker’s beneficiaries might need to pay more in capital gains taxes upon the sale of property than they would need to pay in estate taxes, because the estate tax rate in 2024 is a scary 40%, many estate planners and clients erroneously worry about the estate tax more than capital gains taxes.

However, many people fail to consider that the 40% federal estate tax applies only to amounts over the $13.61 million federal exemption from gift and estate tax in 2024 — and only a small number of states apply a state-level estate tax. Although the capital gains tax maxes out at a 23.8% federal tax (20% max federal rate plus the 3.8% net investment income tax), many states also apply a state-level tax to capital gains, potentially pushing the combined federal and state-level capital gains tax rate closer to 30%. Just as importantly, the capital gains tax has no federal exemption above the original basis in property, so that the capital gains tax generally applies to all appreciation in the property.

Unfortunately for unwary trust makers, by making a completed gift into an irrevocable trust, the trust maker transfers their basis into the trust under Internal Revenue Code Section 1015. Later, under IRC Section 1014, the beneficiaries of the completed gift trust will be disqualified from a post-death step-up in basis upon the death of the trust maker. Although the federal and state tax laws can change, trust makers with highly appreciated property and a net worth of less than about $20 million for singles and about $40 million for married couples should carefully consider their approach to trust planning so that they don’t fearfully focus on avoiding the estate tax and accidentally stumble their beneficiaries into paying more costly capital gains taxes.

In a situation where estate taxes are very likely to be much higher than capital gains taxes, it may be desirable to make a “completed gift” out of the trust maker’s gross estate and allocate it to the estate tax exemption. A trust will be excluded from the trust maker’s gross estate only if the trust maker does not possess or enjoy the trust property (the trust maker cannot be the beneficiary) and if the trust maker does not control the trust property by not serving as trustee, not serving as trust protector or fiduciary, not serving as an adviser, and the trust maker must not retain powers to appoint trustees, fiduciaries or advisers.

By giving up these beneficial rights and powers over an irrevocable trust and the trust property, the trust maker has made a “completed gift.” Consequently, the trust maker must file a Form 709 gift tax return to report the completed gift to the IRS.

Example. A trust maker has property worth $13.61 million. They make a completed gift of the property to an irrevocable trust by retaining no possession or enjoyment or control over the trust and trust property. The trust maker is not the trust beneficiary, the trust maker does not serve as management trustee or distribution trustee, the trust maker is not on any trust investment or distribution committees, and the trust maker cannot appoint a trust protector. Because the trust maker has given up the powers to possess and enjoy the property and cannot control the trust directly or in conjunction with others, the trust maker must file a Form 709 gift tax return with the IRS to report the completed gift. The gift of $13.61 million uses up all of the trust maker’s lifetime exemption from gift and estate tax, so even though the trust maker must file the gift tax return, no gift tax is owed because the trust maker’s exclusion “exempted” the gift from gift tax. Because the trust maker has given up all control and powers, the trust property will be excluded from the trust maker’s gross estate. It is important to note that the trust property excluded from the trust maker’s estate will also not be eligible for a step-up in basis to reduce capital gains taxes for the beneficiaries when they later sell the trust property.

To minimize transfer taxes (gift and estate taxes), a trust maker must make a completed gift to the trust for federal gift and estate tax purposes by giving up “possession and enjoyment,” as well as control (including control in conjunction with another person) over the trust assets. If a trust maker chooses to completely revoke their rights to the trust property through a “completed gift” to a trust, future appreciation on the completed gift asset will be “frozen out” of the trust maker’s gross estate. The determination of whether a person has retained possession, enjoyment and control (and the issue of whether the assets will be included in the estate and subject to estate tax) is somewhat similar to the asset protection discussion over whether the trust will be protected, though asset protection is primarily based on state laws, and estate tax planning is based primarily on federal tax laws.

The decision of whether to complete the gift by giving up control largely must be made with consideration as to whether the estate is currently subject to transfer taxes, whether the trust property has built-in gains for capital gains tax purposes, and if the trust maker believes the trust assets will increase in value or later become subject to transfer taxes or capital gains taxes. By completing a gift into a trust, a trust maker will either use a portion of their annual exclusion from gift tax (the 2024 annual exclusion is $18,000), or a person may use their lifetime exemption from gift and estate taxes ($13.61 million in 2024). Completing a gift to a trust that is more than the annual exclusion from gift tax requires that the contributor of property file a Form 709 gift tax return, and to be certain that the value of the gift is respected by the IRS, they should obtain a qualified appraisal.

No step-up in basis

It cannot be emphasized enough that after completing a gift to an irrevocable trust that is exempt from estate tax, the irrevocable trust will not be eligible for a step-up in basis upon the death of the trust maker. Although the capital gains taxes are taxed at a lower rate compared to estate taxes (capital gains tax at 15% and estate tax at 40%), many trust makers overlook that they have a significant exemption from estate tax, so often the amount of tax owed on capital gains would be more than the tax owed after the estate tax exemption.

Example. A trust maker wants to set up an asset protection trust that is as tax-efficient as possible, accounting for capital gains taxes and estate taxes. The trust maker’s gross estate has a fair market value of $13.61 million, and the assets have a capital gains tax basis of $2 million. To make the determination about how to set up the asset protection trust to be the most tax-efficient, the trust maker would need to determine whether it is less costly to pay estate taxes rather than capital gains taxes as follows:

Estate tax owed = $0. Calculate estate tax assuming the trust maker is residing in a state jurisdiction that does not assess a state-level estate tax, then even though the trust would be included in the gross estate, the estate would owe $0 in estate tax. Estate tax would be calculated at $13.61 million for the fair market value of the assets, offset by the 2024 estate tax exemption of $13.61 million, with the difference of $0 taxed at 40% for a total estate tax of $0. Put differently, the entire (potentially) taxable gross estate was covered by the exemption from estate tax payments.

Capital gains tax owed = $3.3 million. Capital gains taxes are calculated based on the maximum federal capital gains tax rate in 2024 at 20% federal, plus an additional 3.8% net investment income tax. Assuming the trust beneficiary and the trust are residing in a state jurisdiction with a 5% state capital gains tax rate. This puts the total combined federal and state capital gains tax rate at 28.8%. If the trust maker had irrevocably transferred the assets with a fair market value of $13.61 million and basis of $2 million into a trust, then the trust would receive the trust maker’s basis and have built-in capital gains of $11.61 million taxed at 28.8% once the trust property was sold.

Because the trust maker would owe $0 in estate tax but more than $3.3 million in capital gains taxes, it would be a costly mistake for the trust maker to set up a completed gift irrevocable trust in which the trust property was moved out of the trust maker’s gross estate. The trust maker would transfer into the trust their low basis in the appreciated assets and also give up the step-up in basis upon the trust maker’s death for capital gains tax purposes.

Tax laws could change

It is important to again note that a trust where the trust maker retains powers to possess, enjoy or control the trust assets will be included in the trust maker’s gross estate and get a step-up in basis to reduce capital gains taxes. Where the estate taxes will be less than capital gains taxes because of the estate tax exemption, the trust maker will want to retain powers and control over trust assets so that the trust assets are included in the trust maker’s estate and get a step-up in basis to reduce capital gains tax.

Also important is the fact that the calculation of estate and capital gains taxes is dependent on changing federal and state estate tax exemptions, changing capital gains tax rules, as well as changing property values. All of the changes in tax exemption, tax laws and asset values will be amplified if the trust maker lives for a long time, making an initial tax calculation rough and inaccurate — though still a useful starting point in deciding how to deal with the tradeoff between capital gains taxes and estate taxes.

To state the capital gains and estate tax tradeoff a final time: By giving up possession, enjoyment and power, the gift to a trust will be excluded from the gross estate, but the trust property is not eligible for a step-up in basis for capital gains tax savings.

My next article will focus on clearing up the confusion between grantor trust status, basis step-up and estate tax.

Other Articles in This Series

• Part one: To Avoid Probate, Use Trusts for Estate Planning
• Part two: How Quitclaim Deeds Can Cause Estate Planning Catastrophes
• Part three: Revocable Trusts: The Most Common Trusts in Estate Planning
• Part four: With Irrevocable Trusts, It’s All About Who Has Control
• Part five: Ins and Outs of Domestic Asset Protection Trusts (DAPTs)
• Part six: Irrevocable Trusts: Less Control Equals More Asset Protection
• Part seven: Should You or the Trust Pay a Trust’s Income Taxes?
• Part eight: How to Handle Irrevocable Trust Assets Tax-Efficiently
• Part nine: Repeal the Death Tax? These Are the Taxing Trade-Offs

Related Content

• 721 Exchange to Defer Taxes: Pros and Cons
• Are Capital Gains Taxes Keeping You From Selling Property?
• Four Reasons to Tap Opportunity Zones Before They Expire
• Estate Planning for Millionaires
• Kamala Harris Golf Tax and Unrealized Gains? What You Really Need to Know

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Welcome to the high-stakes world of tax-advantaged real estate investing in 2024, where 1031 exchanges and opportunity zones are the gladiators of the financial arena. Let’s dive deep into these two powerhouse strategies, comparing their strengths, weaknesses and the often-overlooked synergies between them. Buckle up, dear reader, for a journey through the twists and turns of the tax code that promises to be anything but boring.

Before we pit these two titans against each other, let's recap the basics for those who might have dozed off during their last chat with their CPA.

1031 exchanges: The old guard

Named after Section 1031 of the Internal Revenue Code, these exchanges have been around for a hundred years, allowing investors to defer capital gains taxes by rolling the proceeds from the sale of one investment property into the purchase of another "like-kind" property. It's like a game of hot potato, but instead of a spud, you're tossing around real estate and keeping the tax man at bay.

Opportunity zones: The new kid on the block

Born out of the bipartisan Tax Cuts and Jobs Act of 2017, opportunity zones are designated opportunistic areas that can benefit from development and job creation. Here, investors can plow their capital gains into new projects or businesses. The carrot? Deferred and potentially reduced taxes on the initial investment, plus the holy grail of tax-free gains on the new investment if held for at least 10 years.

So which one is better for you? Now that we've set the stage, let's watch these two duke it out in a battle royal of tax benefits and investment potential.

Round 1: Flexibility

1031 exchanges: These old-timers offer a wide playing field. You can exchange almost any type of investment real estate for another, whether it's swapping a small apartment building for a sprawling ranch or trading a strip mall for a self-storage facility. It's like real estate musical chairs, and as long as you follow the rules, you can keep playing. Best of all, you are in control of when, or whether, the music stops.

Opportunity zones: Here, your options are more limited. You're restricted to investing in specific geographic areas designated as opportunity zones. It's like being told you can shop only at certain stores in the mall, but those stores are having a massive sale. All you have to do is find a store you like.

Edge: 1031 exchanges take this round for their go-anywhere, swap-anything flexibility.

Round 2: Tax benefits

1031 exchanges: The main draw here is tax deferral. You can keep kicking the tax can down the road, potentially forever if you play your cards right (and don't mind your heirs dealing with it later). It's the investing equivalent of "I'll do it tomorrow" — except in this case, procrastination pays off.

Opportunity zones: While you do get tax deferral on your initial gains until 2026, the real magic happens after 10 years. If you hold your opportunity zone investment for a decade, any gains on that investment are completely tax-free. It's like finding a golden ticket in your Wonka Bar, but instead of a chocolate factory, you get a tax-free windfall.

Edge: Opportunity zones eke out the win in this round. The prospect of tax-free gains is hard to beat, even for the most die-hard 1031 fan.

Round 3: Investment potential

1031 exchanges: These allow you to leverage your entire investment, including the gains, into a new property. It's like trading up houses, but instead of a bigger backyard or an in-law suite, you're aiming for bigger returns.

Opportunity zones: While you can invest only your gains (not the entire proceeds from a sale), the potential for growth in these up-and-coming areas can be significant. It's a bit like backing a scrappy underdog — higher risk, but potentially higher reward.

Edge: This round is a draw. Depending on your investment goals and risk tolerance, both strategies offer unique advantages. If immediate cash flow is of high importance, then the 1031 might be most attractive to an investor, but if growth is of greater importance than cash flow, the opportunity zone could win out for you.

Round 4: Timing and deadlines

1031 exchanges: These come with strict deadlines. You have 45 days to identify potential replacement properties and 180 days to close the deal. It's like a high-stakes version of the classic game show Beat the Clock, where the prize is tax deferral and the penalty is a hefty tax bill.

Opportunity zones: While you have 180 days to invest your gains into a qualified opportunity fund, the clock is ticking on the program itself. As of 2024, we're approaching the end of the first wave of investments made in 2014, and investors are watching closely to see how these decade-long bets pay off. There’s also no guarantee that new investments will be possible after 2026, but that’s a tomorrow problem.

Winner: Opportunity zones take this round for its more relaxed initial timing but with a caveat — the program's future is uncertain beyond the current crop of investments.

But what if you didn't have to choose? What if you could have your tax-deferred cake and eat it tax-free. too, by executing a 1031 exchange into an opportunity zone?

Alas... under the law as it reads now, this hybrid maneuver isn't possible. Qualified opportunity funds do not qualify as a "like-kind" investment under the definitions as laid out by the IRS, since QOZ investments are funds and not properties. We've written before about how a QOZ can serve as a backstop to a failed 1031 exchange in the article Can I 1031 into a Qualified Opportunity Zone?, but by statute, performing a 1031 exchange directly into a QOF simply can't be done.

So if you're getting the idea that the preference of a 1031 exchange over a QOF investment (or vice versa) is a function of the individual investor's circumstances and needs... Well, you've got the right idea!

Real-world example: The tale of two investors

To illustrate these strategies, let's follow two investors: Cautious Carla and Risk-Taking Rick.

Cautious Carla: The 1031 devotee

Carla sold a small office building in suburban Chicago for $2 million, realizing a gain of $800,000. Not wanting to pay capital gains taxes, she used a 1031 exchange to acquire a multifamily property in Nashville for $2.5 million. Carla deferred her entire tax bill and was able to leverage her full $2 million into a larger, potentially more profitable investment.

Risk-Taking Rick: The opportunity zone optimist

Rick also had an $800,000 gain, but from the sale of tech stocks. Intrigued by the potential of opportunity zones, he invested his gains into a qualified opportunity fund developing a mixed-use project in a rapidly gentrifying area of Houston. Rick deferred the tax bill on the $800,000 gain for two years, through the end of 2026 (and hopefully longer, if needed congressional action extends QOZs), but even better, if all goes well and he holds the investment for 10 years, Rick will owe no taxes on any appreciation of his $800,000 investment.

The crystal ball: Looking ahead

As we peer into the future of these investment strategies, several factors come into play:

Political landscape. With every election cycle comes the potential for tax code changes. Both 1031 exchanges and opportunity zones could face scrutiny as lawmakers look for ways to increase revenue.

Economic cycles. As we navigate the uncertain economic waters of 2024, the resilience of investments in various markets and asset classes will be tested.

Opportunity zone maturation. The coming years will reveal the true impact of opportunity zone investments as the first wave of 10-year holds comes to fruition.

Technology and data. Advances in proptech and data analytics are making it easier for investors to identify promising opportunities in both traditional real estate markets and opportunity zones.

In the epic battle between 1031 exchanges and opportunity zones, the real winner is the savvy investor who knows how to leverage both strategies, depending on the needs and goals of the moment. Like a master chef combining unlikely ingredients to create a gourmet dish, the most successful investors in 2024 are those who can blend these different flavors of tax advantage to suit their unique palate for risk and return.

Whether you're a Cautious Carla or a Risk-Taking Rick, the key is to understand your options and work with experienced professionals who can guide you through the complex maze of tax-advantaged investing. After all, in the world of real estate investment, it's not just about location, location, location — it's about strategy, timing and the ability to spot opportunities where others see only risk.

Related Content

• Why the Attack on 1031 Exchanges Is Likely to Fail (Again)
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Can You 1031 Exchange into a REIT?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Similar to your 401(k), the tax deferral looks great on paper as your balance sheet grows. Also similar to your 401(k), the tax bill will make you angry when you go to cash in your chips. However, in the rental business, there is an option to defer your taxes on the gain, so long as you meet certain requirements. At a very high level, 1031 exchanges allow you to exchange one investment property for a “like-kind” property and defer the taxes until you sell that next property.

The purpose of this column is not to examine the many nuances of this section of the tax code, but rather to help you figure out whether you may be a good candidate for a 1031 exchange. If it looks like you may be, you can get into the exciting details of the code. Below are four scenarios we see often.

1. You’re facing a large tax bill.

Without a significant tax bill upon sale, there isn’t really any reason to consider an exchange. However, as noted in my first example, the tax bill is often higher than you expect it to be.

Because investment property is taxed at capital gains rates, folks often make the incorrect assumption that the calculation is the same as if you sold stock. With stock, if you bought XYZ at $100 and then sold it two years later at $150, you have a $50 capital gain. With real estate, it’s not that simple.

With a rental property, you depreciate the value of the actual home, typically over a period of 27½ years. In English, you essentially have a deduction against your rental income. It’s very helpful in reducing your taxes while you own the home, but that benefit gets “recaptured” at sale.

For example, you buy a property for $250,000 and depreciate it by $70,000 over the course of 10 years. Your basis in the property is now $250,000 minus $70,000 equals $180,000. The depreciation recapture typically taxes that $70,000 at 25%, right off the bat. Let’s say you sell the property at $300,000. It seems that the gain should be only $50,000, but it’s the difference between $180,000 and $300,000, or $120,000. You’ll pay about 25% on the first $70,000 and about 15% on the remaining $50,000. The reason I say “about” is because the rate depends on your income. Total tax bill in this scenario is $25,000.

We rely on software and experience to estimate these bills for clients. You can use the free version of our planning software here. However, given that these bills can be large, I would talk to your financial planner and/or tax adviser to get a sense of how much you may owe and what the overall impact on your plan would be.

2. You expect a lower future tax rate.

I write often about Roth conversions. The premise is that your current tax rate is lower than your future tax rate, so it makes sense to pay the bill today and skip it tomorrow. This scenario is the opposite and comes about if you’re in a higher capital gains bracket today than you will be in the future. This could be because you already had a large sale in the current calendar year, or your income pushed you above the 15% capital gains rate.

If this is the case, a 1031 exchange may defer the sale into a future year, when your tax rates have dropped. The most common scenario for Baby Boomers is that they have retired, which means that wages have dropped off their tax return (line 1) and hopefully lessened their tax burden.

3. You’re old enough to defer, defer, die.

The unfortunate reality is that Baby Boomers are moving closer to the third “d,” and therefore, this strategy is better suited to them than it is to Gen X or Millennials. Many will call this strategy a loophole. I’m not sure I’d go that far, but it is quite handy for those who have deferred gains for a long time.

This is where a sale of stock and a sale of investment property act the same. With both stocks and real estate, there is what’s called a “step-up” in basis at death. Let’s say you buy a property for $100,000 and die when it’s worth $500,000. Your beneficiaries don’t have to pay taxes on the $400,000 in gains that accrued during your lifetime. This applies even if you have exchanged several times before your demise, so long as you own the final property upon the aforementioned demise.

4. You don’t want to be a landlord.

For those ready to tap out of the landlord game, swapping one investment property for another seems like a strange move. Delaware statutory trusts (DSTs) are institutionally managed real estate properties or portfolios that qualify for 1031 treatment. Essentially, you become a fractional owner with management by professionals. They pay you a distribution, typically from the rent they receive. Sound too good to be true? It’s definitely too good to be free.

We have recommended these to clients, but I want to be very clear about the downsides. There are many layers of costs that can be uncovered in the investment offering’s legal documents. They, like most real estate, are also illiquid. Think of a plane ride. You’re on the plane from takeoff to landing. There are very few circumstances that would allow you to get out of the investment should you change your mind. Another way to think of this: You get to choose what and when to buy, but you no longer get to decide when to sell.

If all, some or any of these had you nodding your head, it’s time to get to know the 1031 exchange rules. I have had many a prospective client approach me to do this after they sold their property. Perhaps that’s the first thing you should know. If you’re going to do an exchange, you must know before you go to settlement on the current place. It’s kind of like money coming from a retirement account: If it hits your bank account, it’s taxable.

Related Content

• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Drop and Swap 1031 Exchange: A Guide for Real Estate Investors
• Delaware Statutory Trust: The Landlord’s Exit Many CPAs Don’t Know Exists
• Five Thoughts About the Election From a Financial Planner

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Data reveal that last year, approximately 8% of home sales resulted in gains that exceeded the home exclusion threshold. That is more than double the percentage five years ago, according to a report from CoreLogic, a company that provides consumer information and analytics.

Although capital gains tax impacts a growing number of homeowners throughout the U.S., it’s particularly noticeable in states with high property values. It’s also affecting long-term homeowners who have seen significant appreciation in their property values.

So, what can you do about capital gains taxes if your home value has increased? Read on.

Capital gains tax impacts more homeowners 

The capital-gains tax on home sales applies to the profits from selling a property. Homeowners can exclude up to $250,000 of net gains if filing single and up to $500,000 if married filing jointly. Profits beyond these limits are subject to capital-gains tax, at rates that can be as high as 20%, with an additional surtax for some high earners.

To qualify for the capital gains tax home exclusion, the homeowner must have lived in the home as their primary residence for at least two of the five years preceding the sale. But keep in mind: the IRS allows you one primary residence at a time, and you can only claim this exclusion once every two years. For more information on the rules for this tax break, see Kiplinger’s report: The Capital Gains Tax Exclusion for Homeowners.

So, what’s happening? One issue is that the exclusion limit isn't adjusted for inflation. That means the value of the tax relief provided by the home sale exclusion for capital gains tax has eroded over time. 

• As a result, states with high property values, like California, New York, New Jersey, Massachusetts, Florida, and Colorado, are significantly impacted. 
• Homeowners in these areas are generally more likely to experience significant gains that surpass the exemption limit.

Avoid paying capital gains tax 

Several studies find that the prospect of a large tax bill can discourage homeowners from selling, even if they are looking to downsize or move to a more affordable area. However, there are some strategies to help mitigate potential tax impact. 

Documenting expenses for home improvements and renovations can reduce taxable gains. These costs can be added to the home's original purchase price, reducing the net profit subject to tax.

Consider a fictional married couple who purchased their home for $300,000 seven years ago and decided to sell in 2024 for $850,000. Without any improvements, their capital gain would be $550,000, which exceeds the $500,000 exclusion for married couples filing jointly.

However, over the years, imagine they made the following significant improvements totaling $75,000:

• Kitchen renovation: $30,000
• Bathroom remodel: $20,000
• New roof: $15,000
• Adding a deck: $10,000

Their adjusted basis is now $375,000 ($300,000 purchase price + $75,000 in improvements). The improvements reduce their capital gain to $475,000 ($850,000 sale price — $375,000 adjusted basis).

By documenting home improvements (based on this example), the couple, filing jointly, can generally reduce capital gain from $550,000 to $475,000, bringing it under the $500,000 exclusion limit. As a result, they avoid paying capital gains tax on their home sale, potentially saving thousands of dollars.

Other moves to consider:

Keeping track of selling expenses. (Real estate agent commissions, legal fees, and other home selling costs can be subtracted from your capital gains.)

Taking advantage of exceptions. There may be partial exclusions available if you are selling due to work relocation, health reasons, other unforeseen circumstances, or other rules applicable to U.S. Military service members, or a home sale due to separation, divorce, or death of a spouse.

Capital gains tax on home sales: Bottom line

Despite potential tax implications, some homeowners may need to sell their homes for various reasons, such as high maintenance costs and rising property taxes. Others may decide that the benefits of liquidating a high-value asset outweigh potential financial downsides, like capital gains taxes. 

However, with careful financial planning and documentation, the impact of these taxes might be manageable. Consult a trusted and qualified advisor who can help.

Related Content

• How to Reduce Your Property Tax
• Capital Gains Tax on Real Estate and Home Sales
• Tax Breaks for Homeowners and Home Buyers
• States With Low and No Capital Gains Tax

To be fair, this proposal is unlikely to pass Congress, but depending on who ends up controlling the White House and Congress, it conceivably could.

If you are an investor, this is an important topic because it could overturn your assumptions about your appreciating investments. Note that in the case of real estate property, we already do this through a property tax. Currently, in the U.S. we pay taxes only on stocks we have already sold, though.

Unrealized gains tax has been in the news recently due to the Moore v. United States case, as well. In a June ruling on that case, the Supreme Court upheld the mandatory repatriation tax, but in their penned decision, the majority made it clear that this ruling was simply for the MRT and not other situations involving unrealized gains. So the topic is not yet settled, outside of the MRT.

A spending problem

Gross domestic product, or the value of all the goods and services made and created in the U.S., was around $28.27 trillion in the first quarter of 2024. However, as of this writing, our total debt was around $34.83 trillion, according to the U.S. Treasury's Fiscal Data service. The U.S. Congressional Budget Office recently estimated the total debt will exceed $50 trillion by 2034.

Already we are seeing problems funding future liabilities for Social Security and Medicare. We have compounded the problem by expanding the government bureaucracy and funding foreign wars.

While I'm not an economist, as an investor who runs a family office, I believe that instead of taxing unrealized gains, what the government really ought to do is to rein in its spending. The U.S. debt-to-equity ratio was already at around 122% as of late June, compared to around 57% in 2000 and around 34% in 1980, according to U.S. Debt Clock. 

In addition, we are selling more Treasury bill debt. Worse, we are doing it on the short end of the curve with high interest rates. The 2024 federal debt interest payments are forecast to be around $870 billion, compared to $822 billion for defense spending. 

That is not good. Just like with personal finance, if you are not making enough, you need to cut back on unnecessary spending. Running the money printer is not really the answer and has contributed to our problems with inflation.

Meanwhile, the valuation-adjusted U.S. Treasuries holdings of foreign central banks are falling. Maybe these traditional bond buyers see the rising U.S. debt-to-equity ratio and wonder if there is an increasing chance they will not get their money back.

In fairness to the U.S., global debt has risen in many countries, due to the pandemic.

An unfair proposal

So now the emphasis is on creative taxation measures. In my opinion, this new proposal to tax unrealized gains is un-American at the very least. If people and businesses make a profit on the sale of an asset, those definitely need to be taxed. But if the asset has not been sold yet, why tax it?

The U.S. has a very complicated tax code, so I support efforts to simplify it and get people to pay their fair share. However, taxing unrealized gains should be off the table. 

Taxing assets that you have not even sold and profited from is not fair. If this proposal goes through, will the government then also rebate or return unrealized losses?

Imagine you are an innovative tech startup, maybe the next Google or Tesla, but still in a garage. All you can pay your startup employees aside from minimal cash are stock options. Once the company starts growing and the share value of these assets rises, do you really want your company and employees to sell their shares just to pay that tax? Does that not create another taxable event because you sold shares to pay a tax obligation? 

All that would likely do is weaken promising companies and incentivize talented entrepreneurs, creators and others to move out of the United States to innovate elsewhere.

Above all, there is the absence of fairness. The asset owner has not even realized the value of the asset, and the government already wants to tax it. 

That sounds more like confiscation and not really taxation.

Related Content

• Why a Wealth Tax Would Be Terrible for American Taxpayers
• Biden's Plans to Impose an Income Tax on Death
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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

I see all sorts of articles online regarding the benefits of doing $100,000 Roth conversions over a 10-year period, which makes me think that a lot of people aren’t even evaluating income tax brackets. But that’s the best place to start when evaluating whether a Roth conversion makes sense.

Here are three thresholds you need to consider before deciding to do a Roth conversion:

1. Your income tax rate.

This is us looking left. The reality of a Roth conversion is that it’s just a bet that your current tax rate is lower than your future tax rate. If so, you’d rather pay the taxes today. If you’re in the period between retirement and when you start RMDs (required minimum distributions), this can be a pretty safe bet.

I met with a client the other day who is three years out from RMDs. Once both spouses start receiving RMDs, that will push them from the 24% marginal bracket to 32%. So, in doing the conversion calculation, we want to see how much we can convert while staying in the 24% bracket.

2. Your capital gains tax rate.

We are looking right. People talk about capital gains tax rates as though they are 15% for everyone. That is not the case. Evaluating capital gains rates is most important at low income levels and at high income levels.

When your income is very low, a Roth conversion can cause you to go from paying 0% in capital gains to paying 15% on everything. This is an expensive trigger.

Once taxable income crosses above $518,900 (S) or $583,750 (MFJ) for 2024, you jump from 15% to 20%. Less talked about is the 3.8% net investment income tax, which, as it sounds, is a tax on investment income over $200,000 for individuals and $250,000 for a married couple filing jointly.

3. Your Medicare premiums.

Finally, we are going to check the bike lane to ensure we don’t get smacked by an e-bike. Premiums for Medicare Parts B and D are income-adjusted. However, unlike the above income tests, Medicare premiums are determined by gross, not taxable, income. The Part B premiums can increase by as much as $419 per month, per person, based on income. In my experience, this is the one that upsets people the most.

To be clear, you’re not always trying to stay under every threshold. In many situations, it makes sense to pay more in Medicare premiums to avoid a much larger income tax bill down the road.

Evaluating Roth conversions in your situation requires projecting out your future tax rates; i.e., should you even be crossing the road at all? To get a sense of what your rates may look like, you can build out a free plan here.

Related Content

• Roth Conversions: Convert Everything at Once or as You Go?
• Are You Ready to ‘Rothify’ Your Retirement?
• Is a Roth Conversion for You? Seven Factors to Consider
• Roth IRA Conversions: Benefits and Considerations Beyond Taxes
• How a Backdoor Roth IRA Works (and Its Drawbacks)

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Nevertheless, it happens from time to time that politicians say and do things that do fall within my purview. And the recent release of the president’s proposed budget for next year certainly qualifies.

So let’s dig in…

As you may know, the Biden administration recently released its proposed budget for fiscal year 2025. Buried within the $7.3 trillion budget is a provision that would limit capital gains tax deferrals under Section 1031 of the Internal Revenue Code to an aggregated $500,000 per taxpayer annually. While there are currently no statutory limits on capital gains tax deferral, the president’s proposal would mean that real estate investors could defer only a maximum of $500,000 in capital gains taxes ($1 million for couples filing jointly) through 1031 exchanges each year. Any gains above that amount would be fully taxable.

Section 1031 has been in place since the early 1900s and is an important tool for investors seeking to preserve and grow their wealth. The proposed change would be devastating to real estate investors, to the real estate market in general and to the American economy as a whole. And yet, it has taken me a while to address it, for one important reason: I am unconcerned about its prospects of ever becoming law.

Dead on arrival

Let’s be clear: The proposal certainly warrants concern and an aggressive response from the real estate community and investors. And it will certainly get one — just as it did last year when Biden’s proposed budget for 2024 included the exact same proposal. And just like last year, the proposal (and most of the budget with it) will be deemed “dead on arrival” by Congress, including some members of the president’s own party.

To understand why this might be, and why a president would float an idea with virtually no chance of gaining traction, it’s important to understand the process of the federal budget as a whole. The U.S. Constitution grants the U.S. Congress — not the president — the so-called “power of the purse,” or the ability to tax its citizens and spend public money. So Congress can certainly take the president’s budget proposal under consideration. Or they can do what they usually do: hold hearings, debate priorities and ultimately produce a budget whose resemblance to the president’s is entirely coincidental.

It's all politics

The president’s proposed budget is basically symbolic, which begs the question: Why bother producing one at all, much less expend the thousands of hours that go into its production? The answer, in a word: politics.

The president’s budget proposal is a political document, not a practical one. Lacking the force of law, it nevertheless is effective at signaling the administration’s priorities, appeasing various constituencies and, at its most effective, setting the terms of the public debate on certain subjects. Presidents often include items in their budgets that have virtually no chance at becoming law, but that do achieve the goals of energizing their base of voters and possibly forcing their opponents to take unpopular votes, especially in an election year.

This practice is always pilloried as wasteful by the president’s opponents, but it’s clearly a bipartisan tradition. Tracing back through the budget proposal of presidents from the past several decades, it becomes apparent that these “zombie” ideas have a consistent feature:

• President Trump proposed billions for a border wall with Mexico, which served as an effective political rallying cry, if not a serious budget proposal (as it was never going to be accepted, much less funded, by his Democratic opponents).
• President Obama annually proposed a “Buffett Rule” millionaires’ tax, endorsed by Warren Buffett himself, which stood no chance of success, but which enabled him to paint Republicans as “defenders of the rich.”
• President George W. Bush championed the concept of partially privatizing Social Security, an idea that went nowhere in Congress but signaled his conservative bona fides to his supporters.
• President Clinton included a provision to study an internet sales tax in his final budget, a poison pill for the GOP, but a bouquet at the feet of the brick-and-mortar retailers who were important Democratic constituents.
  

Political positioning

All of these proposals shared the same status as opening moves in a long negotiation process at best and pure political positioning (as opposed to an attempt at serious policymaking) at worst.

Which brings us back to Biden’s proposed $500,000 cap on like-kind exchanges in his 2025 fiscal-year budget. The provision would be an unqualified disaster for the real estate market — if enacted, of course.

A 2015 study by Ernst & Young examined the idea of repealing Section 1031 entirely and determined that the cost to the American economy would be over $13.1 billion. A subsequent study by two professors in 2020 concluded that the cost would be closer to $20 billion and would effectively create a “lock-in effect,” resulting in fewer transactions and, ultimately, industrywide price declines.

Not a realistic policy goal

However, once we understand the symbolic nature of presidential budget proposals, it becomes clear that the suggestion of a 1031 cap serves primarily as an opportunity to signal progressive tax priorities, not as a realistic policy goal. The chances of the 1031 cap becoming law are slim to none, just as they were when it was proposed and ignored by Congress last year. But by proposing it again this year, Biden addresses the goal of telling his progressive base that he is still trying to crack down on “loopholes for the rich,” even while moderate members of his own party will distance themselves from the proposal and tout their defense of middle-class homeowners.

They know what we know

Limiting or repealing 1031 exchanges would blast a hole in real estate values, hurt the economy and ironically reduce tax collections over time by depressing activity. Even the more limited $500,000 cap (as opposed to full repeal) would do immense damage because the vast majority of the 1031 exchange dollar volume comes from a small number of high-value transactions that would be largely gutted. Many investors would simply freeze in place, unwilling to sell appreciated assets, removing a huge chunk of supply from the market. We would also see a steep drop in demand and new investment because the after-tax returns on real estate would fall sharply. Inevitably, property values and rents would decline.

So what should you do now?

• Don't make any panic moves or radical changes to your investment plans at this stage. There is a high probability that this provision will not pass congressional muster, just as it didn't last year.
• Stay informed and get involved. Subscribe to my weekly newsletter and watch this space for news of any movement toward enacting this harmful proposal. Contact your representatives in Congress to voice your concerns.
• Should the proposal show signs of gaining any traction, it might be prudent to consider expediting any planned 1031 exchanges in anticipation of potential future legislative changes. However, it's essential to avoid making rash or poorly thought-out decisions. As of now, there are no indications pointing toward restrictions or limits on 1031 exchanges, let alone their complete elimination.

As always, consult your tax advisers and legal counsel about your specific situation before making major initiatives. Everyone's circumstances are different.

Related Content

• It’s Not Too Late to Defer 2023 Capital Gains Taxes
• Can You 1031 Exchange into a REIT?
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Can I 1031 into a Qualified Opportunity Zone?

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

True, it’s possible to file for an automatic extension that kicks the can down the road another six months (though that’s seldom advisable unless absolutely necessary since Uncle Sam is as kind about interest and penalties as Tony Soprano). But by most estimates, roughly nine out of 10 of us have finished up the task of making sure our federal and state tax returns are filed and paid for.

Sizable capital gain for 2023?

But if you’re an investor sitting on a sizable capital gain for 2023 and facing the grim reality of paying a hefty capital gains tax, you might want to take a fresh look. Because depending on the source of your capital gain, there might still be time for you to devise a strategy that defers the payment of these taxes through the end of 2026 … and perhaps longer.

For certain partnership gains, the deferral can still be effectuated using one of our favorite strategies: a new investment in a qualified opportunity zone (QOZ).

Let’s review how to defer capital gains tax

Regular readers of this space know the basics well enough by now: The Tax Cuts and Jobs Act of 2017 created an opportunity to reinvest realized capital gains into any of over 8,500 QOZs in the U.S. and its territories. The twofold aim of a QOZ investment:

• Tax-exempt growth on the new investment
• The deferral of capital gains taxes on the original gain through at least December 31, 2026 (or at the time the QOZ investment is sold, whichever comes first)

The deferral of the initial gain is valuable, of course: A new QOZ investment today lets investors keep their money out of the tax man’s pockets and at work for them for another two to three years. The longer the payment of taxes can be deferred without penalty or interest, the better it is for investors.

The most significant benefit of a QOZ investment is the opportunity to not only let that new investment grow but also cash out of it completely free of any further capital gains taxes. Any QOZ investment that’s held for at least 10 years can subsequently be sold free of federal (and, in most cases, state) capital gains taxes, at least through 2047 (the current date of expiration of the QOZ program). It’s important to note that this exemption also extends to depreciation and tax credit recapture.

But what about the timelines?

As astute readers know, receiving these tax benefits generally requires the QOZ investment to take place within 180 days of the sale of the original asset.

But final regulations (released in December of 2019) provided an added benefit for partnerships, whose partners receiving a Schedule K-1 (Form 1065) can choose to initiate the 180-day window on any of three dates:

• 180 days from the date the asset is sold by the partnership
• 180 days from the last day of the partnership’s tax year (December 31 for calendar-year partnerships)
• 180 days from the date that the partnership’s (nonextended) tax return is due (March 15 for calendar-year partnerships)

The ramifications for 2023?

Let’s say a partnership realized a substantial gain in January 2023 and passed it through to its partners via a 2023 K-1. Using the first (best-known) methodology, it’s already more than 180 days past the date the gain was realized and thus too late for the tax benefits of a QOZ investment.

However, partners remain eligible to participate in the QOZ program by redeploying their capital gains in a new QOZ investment by June 28, 2024 (using the second methodology), or by September 11, 2024, using the third methodology. The later deadline is particularly important when considering that partnerships frequently issue late K-1s as late as the summer in some cases, which often makes either of the first two deadlines inoperable.

Just a few caveats

While a QOZ investment offers significant advantages, especially given its extraordinary tax benefits, some qualifiers must be considered.

Most important, QOZ investments generally occur within the context of a qualified opportunity fund, a pooled investment that can include a single property or project or multiple properties. In either instance, QOFs should be considered illiquid investments, especially since the tax benefits of ownership require a 10-year commitment; certain QOFs may expect an even longer commitment.

Of course, QOFs are not generically wonderful investments, any more than one stock is as good as the next or bonds are interchangeable; returns can and do vary from one QOF to another, based on any number of factors, and there are no guarantees for any of them.

Some QOFs focus on a specific sector, including oil and gas, health care or consumer retail; all QOFs have a geographic component as well, and investors may seek to concentrate in a specific state or city or to diversify according to their needs.

Selecting a qualified opportunity fund is decidedly not “amateur hour,” and it’s wise to consult with experts whose experience can guide you in the right direction (and, just as important, away from the wrong direction).

Deadlines

Finally, as with any tax benefits, it’s critical to observe the relevant deadlines, to submit all paperwork correctly and to perform all due diligence related to the investment itself. The financial team you choose to work with should be well-versed in the ins and outs of QOF investments and should be able to keep you on task in meeting these deadlines; while K-1 partners have more time to use this strategy, the existing deadlines remain firm and inflexible.

Your advisers should be able to show you a wide variety of possible investments to choose from and explain the pros and cons of each one.

Given the thousands of available QOFs in existence, there’s likely to be a good fit for you and still time to mitigate your 2023 capital gains taxes, but you must act promptly.

Related Content

• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Four Reasons to Tap Opportunity Zones Before They Expire
• How to Invest in Qualified Opportunity Zones: Step-By-Step
• Qualified Opportunity Zones vs. 1031 Exchanges
• Qualified Opportunity Zones With an Energy Boost

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Essentially, an installment sale, as defined by the IRS, involves selling an asset with at least one payment received after the tax year of sale. This approach offers a strategic advantage by allowing sellers to spread their capital gains tax liabilities over a predetermined period, typically two years. The appeal lies in its ability to mitigate tax exposure, enabling sellers to manage their tax burden more efficiently.

For instance, imagine an individual decides to sell real estate valued at $5 million with a capital gain of $3 million. By structuring the sale as a two-year installment plan, the seller can realize several benefits.

First, it allows for a more favorable tax treatment, as the capital gains are recognized proportionally over the installment period. This can potentially keep the seller within lower tax brackets, optimizing tax efficiency.

Second, it provides a buffer against sudden spikes in taxable income, reducing exposure to additional taxes such as the net investment income tax.

However, the successful implementation of this strategy necessitates a nuanced understanding of tax regulations and financial implications. Collaboration with legal experts, tax advisers and financial planners is essential to ensure compliance and tailor the strategy to suit individual financial objectives.

In the realm of asset sales, the two-year installment sale strategy emerges as a potent tool for optimizing tax outcomes and enhancing overall financial efficiency. Its strategic application can significantly contribute to wealth preservation and tax management, positioning sellers for long-term financial success.

Related Content

• Worst States for Investors With Long-Term Capital Gains
• States With Low and No Capital Gains Tax
• Capital Gains Tax on Real Estate and Home Sales
• Biden Calls for Doubling Capital Gains Tax
• How Retirees Can Minimize the Net Investment Income Tax

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Most states also impose taxes on long-term capital gains (typically, gains held for more than one year), some at a higher rate than others. So, you may want to familiarize yourself with these worst states for investors before purchasing that investment property or those high-growth stocks.

Worst capital gains tax states for investors  

To determine the worst states for investors, we considered each state’s top long-term capital gains tax rate. We did not compare state tax rates for investors with lower incomes. For that reason, the states on this list might not apply to those with nominal investment earnings. All investors should carefully consider possible tax implications when buying and selling assets.

California

High long-term capital gains tax rate: 13.3%

It’s probably no surprise to see California make this list. The Golden State is well-known for imposing high tax burdens on its wealthiest residents (and investors). 

California is the most expensive state for wealthy investors, with a capital gains tax rate of 13.3% on income exceeding $1 million. And high-earning employees should take note. A newly expanded payroll tax means California’s highest earners to pay an additional 1.1%.

New York

High long-term capital gains tax rate: 10.90%

New York comes in on this list as the second worst state for investors. The high New York 10.90% tax rate applies to capital gains and earned income. 

While this tax rate only applies if your income reaches $25 million, even lower earnings are often taxed at high rates. For example, in the Empire State, income that exceeds just $21,400 ($43,000 for joint filers) is subject to a tax rate of at least 6.21%.

Minnesota

High long-term capital gains tax rate: 10.85%

For the most part, Minnesota taxes long-term capital gains the same as it does short-term gains and ordinary income. 

However, high-earning investors in Minnesota are subject to an additional 1% tax on net investment income that exceeds $1 million. That makes the top tax bracket for capital gains in the North Star State 10.85%.

New Jersey

High long-term capital gains tax rate: 10.75%

New Jersey ranks just below Minnesota, with a high tax rate of 10.75%. The 10.75% rate applies to all taxable income of $1 million or more for single filers. The rate drops to 8.95% if your earnings don’t exceed half a million. 

However, investors with as little as $75,000 in gains will still pay more than 6% to the Garden State.

Washington DC

High long-term capital gains tax rate: 10.75%

The District of Columbia ties with New Jersey as the fourth worst state for investors when it comes to long-term capital gains tax rates. The high 10.75% tax rate in Washington DC applies to taxable income that exceeds $1 million. 

However, lower-earning investors can also experience high tax burdens. For example, the tax rate doesn’t fall below 9% unless you have less than $250,000 in gains, and even then, income that exceeds $60,000 is taxed at more than 8%.

Oregon

High long-term capital gains tax rate: 9.9%

Long-term capital gains tax rates fall below 10% in Oregon. However, the investment income brackets are far less generous than in many states on this list. 

Single filers with taxable income of $125,000 or more ($250,000 or more for joint filers) are subject to the 9.9% tax rate. And taxable income in the Beaver State that exceeds $3,750 ($8,100 for joint filers) is taxed at a minimum of 6.75%.

Massachusetts

High long-term capital gains tax rate: 9.0%

While the Massachusetts income tax rate is 5% for most people, millionaires can pay significantly more. That’s because a Massachusetts millionaire tax enacted last year requires investors and — other earners with taxable income — to pay a 4% surtax on earnings over $1 million. 

In Massachusetts, investors with short-term gains (i.e., investments held for less than one year) can face even higher tax burdens, with rates that climb to 12.5%.

Vermont

High long-term capital gains tax rate: 8.75%

Long-term capital gains are taxed as regular income in Vermont. The rates range from 3.35% (on up to $42,150 for single filers and $70,450 for joint filers) to 8.75% (on more than $213,150 for joint filers and $259,500 for joint filers). 

However, Vermont offers a long-term capital gains tax exclusion of up to $5,000.

Hawaii

High long-term capital gains tax rate: 7.25%

While the long-term capital gains tax is higher in Hawaii than in most states, the Aloha state places lower tax burdens on investors than workers. 

All capital gains in Hawaii are taxed at a flat 7.25%, but the tax rate on earned income can reach as high as 11%. Even single filers with earned income of just $25,000 pay a higher tax rate than investors with the same earnings.

Maine

High long-term capital gains tax rate: 7.15%

Maine taxes long-term gains the same as earned income, which means investors with gains that exceed $58,050 ($116,100 for joint filers) are subject to the high 7.15% income tax rate. 

The Pine Tree State doesn’t favor taxpayers with lower investment income. The lowest tax rate in Maine is still a high 5.8% and applies to income up to $24,500 (up to $49,050 for joint filers).

Honorable mention: Washington

High long-term capital gains tax rate: 7.0%

Washington didn’t quite make the list of the top 10 worst states for investors. However, the Evergreen State deserves an honorable mention since it taxes certain long-term capital gains but not earned income. 

The good news is that the controversial Washington capital gains tax only applies to certain long-term gains that exceed $250,000, and there is no capital gains tax on real estate.

Related Content

• States With Low and No Capital Gains Tax
• Capital Gains Tax on Real Estate and Home Sales
• Biden Calls for Doubling Capital Gains Tax
• Capital Gains Tax Rates for 2024
  
  
  

Directly exchanging into a REIT does not qualify for tax deferral under IRS rules, for reasons we’ll explore below. However, two compelling alternative vehicles exist that check many of the same boxes that REITs do, allowing investors to still delay tax obligations while accessing exposure to institutional-quality real estate assets.

We’ll explore both of these REIT-like options: the UPREIT (umbrella partnership real estate investment trust), also commonly known as the 721 exchange, and the Delaware statutory trust (DST), both of which enable participation in diversified portfolios of professionally managed properties while continuing tax deferral.

Let’s examine these instrumental strategies for unlocking real estate investments without triggering immediate capital gains tax burdens.

Exchanging into a REIT disqualifies tax deferral

First, why does the simple act of swapping directly into a REIT not qualify for a 1031 exchange? On the surface, it would seem to follow logically that a REIT would qualify as the “like-kind” asset needed to complete a 1031 exchange since REITs focus on owning and operating commercial real estate assets.

The IRS politely disagrees, however, holding that REIT shares are personal property, not real property. There is indeed real property that serves as the underlying investment, but the REIT investor has no direct claim, control or specific legal rights over any of the assets held by the REIT structure itself. Instead, REIT shareholders have a paper asset, affording no tangible rights to use, access or dispose of the properties in question.

Additionally, while REITs have predominant exposure to real estate assets, many also generate substantial ancillary revenue streams from activities like lending, advisory services, development and securitization, well beyond straight property acquisition, management and disposition. These secondary revenue streams further serve to undercut the argument that a REIT would be a like-kind investment in a 1031 exchange when relinquishing a piece of real estate investment property fully owned by the investor.

UPREITs to the rescue: The magic of a 721 exchange

Enter the 721 exchange, or the UPREIT. This increasingly popular financial structure allows REIT vehicles to bake in tax-deferred exchange capacity through a paired operating partnership tied to the REIT itself.

Here’s how it works in brief:

• A public REIT establishes or takes a controlling ownership stake in a separate operating partnership
• Investors directly contribute investment property into the operating partnership, in exchange for fractional ownership units in the UPREIT
• Operating partnership units received can be exchanged, without triggering tax liability, to eventually redeem fractional ownership equity directly in the founding umbrella REIT

In other words, directly contributing investment real estate into the underlying operating partnership tied to a REIT addresses the IRS’ definition of like-kind property. The operating partnership units serve as connective tissue, allowing 1031 investors to redirect tax liability through the continuity of direct ownership interest in like-kind property assets.

The UPREIT approach has proven popular in recent years. Over $100 billion in commercial real estate assets now use such partnerships to enable tax-deferred injections from 1031 exchangers seeking to roll over their gains.

Blue-chip REITs like Prologis, Digital Realty Trust, Vornado Realty Trust and W.P. Carey not only pioneered 721 exchanges to enable steady growth through tax-efficient asset pooling but continue to use them as such today. The structure has an established history of providing capital, liquidity and scale while often rewarding contributing partners.

Exploring the powerfully flexible Delaware statutory trust

While UPREITs provide scalability and professional management access, more tailored high-touch exposure also exists for those seeking greater involvement, control or niche sector participation absent the constraints of mammoth institutional vehicles.

Enter the Delaware statutory trust, a specialized trust that legally structures fractional beneficial ownership of commercial real estate assets among a pool of as many as 500 stakeholders. Unlike REITs, DSTs directly hold legal title to physical property assets like apartment communities, affordable housing sites, medical offices, self-storage facilities, retail power centers, industrial warehouses or specialty commercial developments among virtually all classes, with the goal of reliable occupancy and stable cash flows.

The direct ownership of multiple tangible assets then enables fractionalized sale of divvied-up beneficial interest to cohort investors, making a DST an attractive option for a 1031 exchange and even for the eventual division of an asset among multiple inheritors.

This effective framework is a boon for 1031 exchangers, allowing them the flexibility to redeploy capital gains into fractionalized shares in tangible fully owned properties. In addition, by directly deeding commercial real estate assets into a tailored DST and fractionalizing them into distinct equity shares (available for purchase by 1031 exchangers), specialized trust sponsors enable 1031 exchangers exposure to a higher-quality property portfolio that is generally not attainable by everyday investors.

Portfolios potentially spanning dozens of properties across both geography and sector mitigate the risks of concentration. Fractional shares translate into lower investment minimums, while direct ownership builds in the tax deferral that is central to the value of a 1031 exchange.

DST investors benefit from property management access, passive investment simplicity and diversification. DST structures also generally target stability and preservation of capital over higher-risk value-add or opportunistic plays — although sponsors continue to expand the risk/reward profiles as DSTs gain in popularity.

Ease of execution constitutes another desirable advantage over traditional physical 1031 exchanges. Investors need only wire proceeds and select a fractionally owned asset portfolio that fits their needs, as opposed to identifying potential swap properties, conducting physical inspections and due diligence, structuring financing and negotiating with the realization of deferred tax liabilities post-exchange.

The DST sponsor assumes responsibility for everything from acquisition and improvement to financing, compliance, accounting, reporting, customer relations, disposition and all administration. Investors can sit back, collecting distributions generated from assets now partially owned yet otherwise outside their ability to source or manage individually.

DSTs are also frequently used in tandem with UPREITs, particularly in cases where the DST is offered with a two-year 721/UPREIT feature. With this common setup, an investor will exchange into a DST, subsequently using a 721 exchange within a couple of years to move from the DST into a REIT. An experienced adviser will be able to handle all aspects of this transaction.

In sum, the DST combines flexible customization with institutional sophistication in a tax-efficient vehicle for savvy real estate investors looking for an alternative to simply rolling over into another piece of personally owned and operated real estate.

Think ‘best of both worlds’

While the traditional public REIT fails to enable a seamless 1031 exchange, both 721 exchanges/UPREITs and DSTs can bridge qualified investors into the stability, cash flow, appreciation and wealth preservation benefits of pooled large-scale institutional real estate investing.

For investors navigating the deployment of lump-sum capital gains from selling appreciated property, redirecting those gains into durable cash-flowing portfolios with the tax benefits of a 1031 exchange allows beneficial interest in assets that would otherwise demand deep expertise, even deeper pockets and disproportionate individual effort. Both vehicles blend the principal benefits of direct ownership with institutional access.

The ability to defer tax burdens into the future while still participating in stable value creation makes both the UPREIT and DST compelling solutions for shrewd investors contemplating redeployment of legacy investment proceeds.

Related Content

• Opportunity Zone Investing Still Hot Despite Looming Sunset
• Four Reasons to Tap Opportunity Zones Before They Expire
• 1031 Exchanges: A Matter of Life and Death?
• 11 Reasons to Consider a 1031 Exchange
• Delaware Statutory Trust: A Viable Alternative to Debt Replacement

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

When it comes to real estate investing, three of the most powerful tax-smart options include:

• Qualified opportunity zones (QOZs)
• Delaware statutory trusts (DSTs)
• Real estate funds

All three of these distinct real estate investment avenues can provide investors the unique opportunity to navigate tax implications while potentially maximizing financial gains.

Why is tax-smart investing so important for today’s investing landscape? Smart investors understand that by minimizing potential taxable events, they can capture significant financial advantages that range from enhancing returns to facilitating intergenerational wealth transfer.

How qualified opportunity zone funds work

One of the most overlooked tax-savvy investing vehicles is the qualified opportunity zone fund. QOZ funds were born out of the Tax Cuts and Jobs Act of 2017 and were designed to encourage long-term investments into low-income communities across the United States. QOZ funds invest in real property or operating businesses within an opportunity zone, typically a geographic region that has been designated as underserved or blighted. In some ways, QOZ funds can be considered a social investment designed to entice private capital to underserved communities.

Here are a couple of examples of how QOZ funds work:

• Example No. 1: Investors who receive capital gain income from the sale of any appreciated asset can reinvest this income within 180 days of the sale of the investment asset into a QOZ fund until the end of 2026 to successfully defer their capital gains taxes. That means investors don’t owe the IRS a penny on that income until April 2027.
• Example No. 2: Investors can potentially receive an even bigger benefit with QOZs by holding their investment for at least 10 years and a day. After this hold period, they don’t have to pay even a single penny in taxes on the profits they made over that 10-year span — no matter how large these profits are. As always, there are never any guarantees that a QOZ fund or any investment vehicle will appreciate in value.
  

What to beware of with QOZ funds

As great as QOZ funds sound, investors need to evaluate a project’s true investment potential before considering the tax benefits, especially since investors are typically required to keep their money locked up for at least 10 years in order to enjoy the full tax benefit. Like any real estate investment, there is no guarantee for cash flow, distributions or appreciation, and such an investment can result in the full loss of invested principal.

On the other hand, plenty of QOZ development projects are available, and because many of these locations were determined to be economically challenged areas based on the 2010 Census, it is very possible that some could be in economically improving neighborhoods.

How Delaware statutory trusts work

Delaware statutory trusts (DSTs) stand out as a tax-savvy choice for many investors. First, DSTs qualify as "like-kind" real estate for the purposes of a 1031 exchange. This alignment grants investors the opportunity to defer capital gains taxes upon selling an investment property. To realize the benefits, investors direct the proceeds from the sale of their property toward purchasing a DST to receive a beneficial interest in professionally managed, high-quality institutional real estate assets. For instance, think of a 300-unit multifamily building located in attractive, secondary markets such as Nashville, Raleigh-Durham, Charlotte or Denver.

Furthermore, DSTs may own properties leased by single tenants operating under long-term net leases, such as prominent companies like FedEx, Amazon or Walgreens.

Second, DSTs enable investors to potentially diversify their real estate holdings without triggering immediate tax liabilities. Because DSTs can include an entire portfolio of properties, investors can spread their investment across various assets, locations and industries to help reduce the risk associated with investing in a single property or market.

Third, DSTs can offer investors significant estate planning advantages by allowing investors to transfer ownership interests to heirs. One of the key tax advantages of passing real estate property to heirs is that those recipients benefit from a step-up in basis. This step-up in basis is much like hitting the reset button on a property's current market value. Furthermore, this step-up in value can represent a significant benefit for anyone who inherits a property that has seen even modest appreciation.

Risks associated with DSTs

DSTs contain the same risks that all real estate investing entails, such as ongoing vacancy, tenant bankruptcies, problematic tenants, economic downturns, physical damage and unexpected repairs. Bottom line: There are no guarantees in real estate.

Also, unlike stock shares and other liquid investments, which can be bought and sold relatively easily, real estate investments like DSTs typically cannot be sold in a day, week or even a month.

How real estate funds work

In general terms, any “fund” is simply a pool of capital that has been assembled on behalf of a group of investors to purchase assets. A real estate income fund is a specific subset of funds that is focused exclusively on investing in potentially income-generating real estate. They are particularly appealing to accredited investors who want to own institutional-quality real estate that may normally be out of reach. A real estate income fund’s sponsor oversees all the fund’s activities, including performing real estate review and analysis, underwriting and property management.

Real estate income funds also provide investors the potential for depreciation. This non-cash expense lowers the taxable income earned in the fund. This may hold significant benefits for investors in high-tax states such as California and New York.

In addition, investors can potentially receive interest deductions in real estate income funds by deducting interest expenses associated with a variety of components within the fund. These can include:

• Mortgage interest. Interest paid on loans or mortgages used to purchase, improve or refinance real estate properties within the fund.
• Operating expenses. Interest on loans used for operational expenses related to real estate, such as repairs, maintenance or renovations.
• Development loans. Interest incurred on loans for property development, construction or significant renovations within the fund.

In navigating the intricate landscape of real estate investing, embracing the nuances of tax-smart strategies is not just a choice, but a pivotal advantage. QOZs, DSTs and real estate funds are the trifecta of tax-savvy investment options. 

Regardless of what vehicle real estate investors decide to pursue, it is important to always consult with their CPA or tax attorney prior to investing in any of these options, as well as to read each offering’s private placement memorandum (PPM) for a full discussion of the business plan and risk factors.

Related Content

• Three Asset Classes Delaware Statutory Trust Investors Should Avoid
• Four Ways Savvy Investors Use DSTs for Their 1031 Exchanges
• Opportunity Zone Investing Still Hot Despite Looming Sunset
• 1031 Exchange: Do You Know Your ‘Like-Kind’ Options?
• 11 Reasons to Consider a 1031 Exchange

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

With certain key provisions in the Tax Cuts and Job Act set to begin expiring after 2026, investors face a closing three-year window to maximize the financial advantages baked into the QOZ cake. Yet several compelling factors still make opportunity zones highly favorable for near-term capital deployment — from proposed congressional extensions to specialty sector funds targeting major industries with footprints in qualifying regions.

Let’s examine what continues to make this arena an attractive avenue for tax-free wealth development, even as deadlines loom.

Core tax incentives driving opportunity zone investments

As many readers are aware, the QOZ program centers on three primary tax incentives for investors rolling existing capital gains from stocks, bonds, business sales, real estate, cryptocurrencies, etc., into qualified opportunity funds within 180 days from the realization of the gain. These funds then deploy those gains into qualifying real estate development or operating businesses located within Census tracts certified as low-income opportunity zones. The primary tax incentives driving investment since 2017 have been:

• Deferral of taxes due on the capital gains invested until December 31, 2026
• Permanent elimination of any taxes owed on appreciation of the opportunity zone investment if held for at least 10 years

A three-year tax deferral on capital gains taxes is certainly valuable but pales in comparison to the possibility of an investment that could potentially be entirely free of any capital gains taxes, provided it’s held for at least 10 years.

With over $10 billion already deployed into job-creating community revitalization projects nationwide, the QOZ incentive has seen tremendous traction since its bipartisan origins. However, with the deferral extension ending after 2026, investors looking to maximize value face a ticking clock that is set to sunset the program at the end of December of that year.

Unless …

Proposed legislation could potentially extend QOZs

On the political front, bipartisan efforts through the Opportunity Zones Improvement, Transparency, and Extension Act in Congress seek to strengthen and lengthen QOZ incentives by:

• Making permanent the tax-free appreciation provision for longer-term investments held over 10 years
• Extending capital gains deferral through 2028 — a two-year extension to drive continued near-term investments
• Empowering states to nominate new opportunity zones, based on updated 2020 Census information
• Allowing for qualified opportunity “funds of funds” by enabling a QOF to invest in other QOFs, a practice not permissible under current law

While an uncertain fate awaits in a bitterly divided Congress, it’s also true that Congress was no less divided in 2017 when the original legislation passed, so hope springs eternal. At any rate, the latest bill language signals a willingness by lawmakers to lengthen the most powerful tax provisions, even as parts of the statute are slated to expire after 2026.

The rise of specialized opportunity zone fund strategies

Irrespective of whether legislation can successfully extend the program’s existence, another recent development in the field should provide further incentive to initiate a QOF investment. In the past few years, more niche fund strategies have emerged, targeting specialized industries with major footprints overlapping counties containing certified QOZs. One in particular provides the rare chance to marry a timely investment opportunity to some of the most powerful tax incentives we’ve seen in a generation or more. We’re speaking, of course, about oil and gas QOFs.

In prolific oil states like Texas, specialized QOFs tailor capital raising and asset allocation specifically to the energy sector. The very best funds feature veteran management teams and focus on financing infrastructure or providing expansion/acquisition growth capital to services contractors that are opening new operations in qualifying counties.

The timing couldn’t be better. Despite (or perhaps because of) the proliferation of interest in electric vehicles, a perceived reduction for the need of fossil fuels has led to a sharp reduction in exploratory activity. And as predictably as the rising of the morning sun, demand is now outstripping supply in the oil and gas sector. Perhaps we’ll all be driving battery-operated, windmill-powered cars in the future, but that future is decades away, and here in 2024, the need for fossil fuels is actually increasing, not falling!

Enter these energy-focused QOFs, which allow accredited individuals and institutions to strategically deploy capital gains into tangible drilling, midstream or production assets, while contractually anchoring those assets and activity back into still-recovering communities vulnerable to recurrent industry volatility cycles. As recovering oil regions expand production rapidly among ongoing global supply deficits, new investments in these niche funds could well enjoy embedded exponential growth potential. And all with the sweetener of QOZ benefits like tax-deferred ... or tax-free ... compounding growth!

Compelling reasons to act through late 2026 … and beyond?

Oil-and-gas-targeted qualified opportunity zone funds exemplify sector-specific channels remaining open for those looking to align financial objectives of maximal growth and minimal taxes with outsized social returns on investment. Of course, gains are never guaranteed in the oil and gas sector or in any other investment, and the need to work with an experienced financial team to identify the proper QOF opportunities just can’t be overstated.

While uncertainty hangs over the exact duration of QOZ advantages, compelling reasons persist for qualified investors to put eligible capital gains to work via this program both in 2024 and over the next few years. The confluence of still generous existing tax benefits through 2026, future upside from potential incentive extensions, intergenerational tax exemption on appreciation and sector-specific fund strategies keep opportunity zones offering outsized exposure to burgeoning markets.

Investors just learning about QOFs might think they’ve missed the boat. In fact, while the ideal time to invest in QOFs may have been in 2017, the next best time is right now.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tax-loss harvesting is generally considered an end-of-year planning strategy. However, there are opportunities throughout the year to thoughtfully manage your gains and losses in order to plan for your year-end tax bill. Work with your financial adviser to continually review your portfolios and consult your accountant to understand if tax-loss harvesting is appropriate for your situation and you can fully benefit from it.

If you would like to consider tax-loss harvesting, here are a few things to keep in mind.

Tax-loss harvesting basics

When you sell a security at a price higher than you paid for it, you realize a capital gain. Generally, realized gains will be subject to capital gains taxes. Tax-loss harvesting is a strategy to sell securities that have a loss (that is, their current price is less than you paid for them) and use those losses to offset gains on other investments. If done properly, tax-loss harvesting can effectively reduce or eliminate the capital gains tax incurred on realized gains in the same tax year.

In addition, if you have more realized capital losses than realized capital gains in a tax year, you can use up to $3,000 of unused losses to offset ordinary income. You can then carry forward any remaining unused losses to use against future capital gains.

The wash sale rule

Many investors may look to take advantage of unrealized losses in securities they would still like to own. However, if you would like to take advantage of a tax-loss harvesting strategy, you must be careful to not trigger a wash sale, which could disallow your loss in the year it is realized.

A wash sale occurs when you sell an investment at a loss and then purchase the same investment or one that’s “substantially identical” within 30 days before or 30 days after the sale date, excluding the sale date. For example, if you are selling a stock at a loss and then purchase the same stock, a call option of the same stock or a security that is similar enough to the stock you sold, you can trigger a wash sale.

If a wash sale occurs, taxpayers will be prohibited from claiming a loss on the sale in the year it’s realized. Instead, the loss is deferred until you sell the replacement security. You should consult with a qualified tax professional to help determine whether a replacement security may be “substantially identical” to the one you sold.

How to avoid triggering a wash sale

If you’re planning to take advantage of a tax-loss harvesting strategy, it’s very important to be mindful of the 61-day window for triggering a wash sale as you make your investment decisions. For example, if you sell a stock at a loss on January 1, you would have needed to purchase that stock or any substantially identical security before December 2 (of the prior year) or after January 31 to avoid a wash sale.

Purchasing the same or substantially identical security in a different account, for example an IRA, is still a wash sale. If you have multiple accounts, including professionally managed accounts, it’s especially important to keep the wash sale rule in mind. If you sell a security at a loss in one account and your money manager purchases that security in a separate account within the 61-day period, it would trigger a wash sale.

There are a couple approaches that can keep you exposed to the market without triggering a wash sale:

• You can “double up” on the security more than 30 days before you intend to sell it (and keep the newly purchased portion)
• You can wait at least 30 days after you sell a security before you repurchase it
• You could purchase a substitute security for a company in the same sector that may trade similarly, but is not deemed to be substantially identical by the IRS. For example, if you sell one beverage company stock at a loss and buy a different beverage company stock to replace it, this would not be a wash sale as long as the companies are not otherwise linked
• You could sell a stock and then purchase a mutual fund or ETF that covers that stock’s sector, and it would not be a wash sale, even if the stock is owned by the fund

Ultimately, you should consult with your tax advisers to determine whether you are at risk for triggering a wash sale and undoing any tax-loss harvesting plans you have in place.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.