Can Gifting Private Company Stock Reduce Estate Taxes Using the Lifetime Exemption?
Selling appreciated real estate can create a sizable tax bill, but the amount owed depends on more than the sale price.
For investors evaluating capital gains tax real estate strategies, the structure and timing of the transaction can matter significantly. The key is to review the available options before the sale closes.
A real estate sale can generate more than one type of federal tax exposure. Gain generally equals the amount realized on the sale less the property’s adjusted basis, which is typically reduced by depreciation deductions taken during ownership. For 2026, long-term capital gains are generally taxed at 0%, 15% or 20%, depending on taxable income. The IRS sets the 0% ceiling at $49,450 for most single filers and $98,900 for married couples filing jointly, while the 20% rate applies above $545,500 and $613,700, respectively.
Depreciation Recapture also matters. For depreciated real estate, part of the gain may be treated as unrecaptured Section 1250 gain and taxed at a maximum 25% rate. That means the depreciation recapture real estate investors face can make the tax bill materially different from a simple appreciation calculation. Higher-income investors may also owe the 3.8% Net Investment Income Tax, depending on their income and circumstances.
A Section 1031 exchange allows an investor to defer gain when real property held for business or investment is exchanged for other qualifying real property. The deferred gain carries into the replacement property rather than disappearing. To qualify, replacement property must be identified in writing within 45 days after transferring the relinquished property and received within 180 days, or by the tax return due date including extensions, whichever comes first. A qualified intermediary is commonly used so the seller does not receive proceeds directly. Properly structured, this can provide 1031 exchange tax deferral while keeping capital invested in real estate.
The most damaging 1031 mistakes are often procedural. Missing the 45-day identification deadline or 180-day acquisition deadline can invalidate the exchange. Replacement property must also be identified clearly and in writing. Investors can create problems by receiving or controlling sale proceeds instead of using a qualified intermediary, exchanging property that is not held for investment or business use, or assuming personal-use property qualifies. Related-party transactions have additional restrictions and can trigger gain if the rules are not followed. Because many errors cannot be fixed after closing, exchange planning should begin before the sale is completed, not after the proceeds arrive.
A 1031 exchange is not the only way to manage tax on a sale. An Installment Sale can spread eligible gain over multiple tax years as principal payments are received, although depreciation recapture may be recognized in the year of sale. Qualified Opportunity Fund investments can defer eligible gain, but the rules change after 2026. For amounts invested after December 31, 2026, gain is generally recognized no later than five years after investment, with a 10% basis increase after five years, or 30% for certain Qualified Rural Opportunity Funds. Charitable Remainder Trusts can alter the timing of taxable distributions to beneficiaries.
The right strategy depends partly on how long the property has been held and how it has been used. Property held for more than one year generally receives long-term capital-gain treatment, while shorter holding periods generally produce ordinary-income treatment. A 1031 exchange applies to qualifying real property held for investment or business use, not property held primarily for sale. Income matters because federal long-term capital-gain rates vary with taxable income. Investors comparing capital gains deferral real estate strategies should consider liquidity needs, future ownership plans and expected income in later years. The best answer often changes when those variables change.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Trey Webb, partner in Bennett Thrasher’s Real Estate and Hospitality Tax Group, or call us at 770.396.2200.
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