I frequently get emails from people wanting to reduce their tax burden, particularly for an upcoming or already realized capital gain. I even had someone ask recently how to get out of paying the taxes on a Roth conversion (and no, they weren't talking about the tax-free Backdoor or Mega Backdoor Roth IRA process).

I've been a taxpayer for many years. I've had two-, three-, four-, five-, six-, and seven-figure tax bills depending on the year. Maybe if I get really lucky (or inflation goes crazy), I will someday pay an eight-figure tax bill. I assure you that there are worse things than having a large tax bill—like having a small tax bill or no tax bill at all. When you have a big tax bill, it's because you made a lot of money. That's a good thing, despite the apparent anaphylactic reaction some people have to the idea of paying taxes. I swear some people would rather have less money themselves if it means they can starve the government of some tax dollars.

Sometimes, the right answer is to just pay the taxes and move on. But it is worth pausing for a minute to consider the alternatives to paying the taxes. They do exist, but most of them have significant downsides you need to be OK with before proceeding.

#1 Tax Evasion

One option is to cheat on your taxes. This has downsides ranging from painful audits with interest and penalties to jail time. It probably works frequently, especially with an IRS strapped for money. It's not exactly an option I can recommend, though. You might not like everything our government does, but I bet you like something. Just pretend your taxes are going toward that cause.

More information here:

Tax Evasion and Frivolous Tax Arguments

Tax Policies: Enjoy Them But Also Reform the Right Ones

#2 Use Tax Losses to Offset Gains

Those with taxable investing accounts should tax-loss harvest recent investments when the markets drop, even if they don't necessarily foresee a big capital gain in their life. If nothing else, you can use $3,000 of those losses every year against your ordinary income.

Strategic use of tax losses can lubricate all kinds of financial situations later in life. Imagine you had a $10,000 tax loss you were carrying forward to retirement, and you also have a tax lot you bought a little over a year ago for $100,000 that has appreciated to $110,000. Now you can spend $110,000 without any associated tax bill by using that loss. Or perhaps you downsize your highly appreciated home upon retirement without any associated tax bill. Or use appreciated assets in your taxable account to pay for Roth conversions without having to pay capital gains taxes.

There are interesting strategies to try to help you maximize the amount of tax losses you can wring out of a taxable portfolio. The most well-known is direct indexing, where you (or, really, your hired manager) buy all the stocks directly and sell them every time they go below your basis, all while trying to provide a return similar to a true index fund. If fees remain very low, the manager does a good job tracking the index, and you have a use for additional tax losses, you can come out ahead doing this. Unwinding the ownership of hundreds of individual stocks can be a pain later if you change your mind, though.

#3 Die

While it has its downsides, death has some serious financial upsides for those with large capital gains. The gains just go away. This is referred to as the “step up in basis at death.” Basically, if you and your heirs can wait to sell until after your death, they'll save up to 23.8% + state taxes on all of your gains. Maybe you don't want to be a landlord for the rest of your life, but you can pay an awful lot of management fees for many years on an appreciated property and still come out ahead when the alternative is a large tax bill.

Note that you don't have to die to access money in the asset. You can borrow against it, whether it is a mutual fund portfolio or a real estate property. You'll pay interest instead of capital gains taxes, but sometimes that is a better deal, especially for short periods of time and during times of low interest rates.

#4 Give Appreciated Assets Instead of Cash to Charity

Once you have investments outside of retirement accounts, it is kind of silly to use cash for your charitable donations. Donate appreciated shares (or other investments) you have owned for at least one year instead. Assuming you itemize, you still get the full charitable deduction for the value of the investment on the date of donation. Perhaps more importantly, neither you nor the charity pays capital gains taxes on the gains.

Note that if you didn't own the investment for at least one year, you only get to deduct the basis (the amount you paid for the investment) on your taxes. There is no waiting period or wash sale when donating to charity, either. You can buy back the exact same shares at the same time you donate your appreciated ones. While this is most easily done with ETF or mutual fund shares via a Donor Advised Fund (DAF), many charities would bend over backward to receive any large donation, including rental property.

More information here:

How to Lower Taxable Income

Do You Need a ‘Tax Strategist?’

#5 351 Exchanges

A relatively new option for people who own a bunch of individual stocks with large capital gains but who would rather diversify their portfolio is a 351 exchange. Not many options exist, and many financial advisors are not yet comfortable recommending them. But it is something to look into if you realized way too late into your taxable investing career that picking stocks probably isn't the best way to invest in them.

Basically, you take a diversified portfolio of individual stocks and exchange them in a tax-deferred manner for an ETF that now owns those stocks along with a bunch from other investors who exchanged into the portfolio. The devil is in the details, of course. You may not really want this new ETF either. Maybe you don't like the stocks it owns, or perhaps it has particularly high fees.

#6 1031 Exchanges

The tax bill associated with selling gets even worse with direct real estate investments. Not only do you have to pay capital gains, but depreciation is recaptured when you sell. While it is only recaptured at a maximum federal income tax rate of 25%, you can avoid paying those taxes by NOT selling and instead exchanging (called a 1031 exchange) from one property to a similar one. The definition of “similar” is actually pretty generous. And if you exchange into a more expensive property, you can get even more depreciation on the new property. There are some strict timelines involved in a 1031 exchange. You have to identify the new property within 45 days of the sale of the old one and complete the purchase of the new one within 180 days of the sale of the old one.

#7 721 ‘UPREIT' Exchange

A 721 exchange is often called an Umbrella Partnership Real Estate Investment Trust (UPREIT) exchange. This is another option for direct real estate investors who don't want to be direct real estate investors anymore but who also don't want to pay the capital gains taxes to get out of their properties. They can simply (OK, maybe not so “simply”) exchange their property for shares of a Real Estate Investment Trust (REIT). The REIT usually has to actually want your property for its portfolio, but if so, this can be a great deal for you.

Technically, you're not getting REIT shares; you're getting “Operating Partnership (OP)” units. After a specified period, your OP units are convertible to REIT shares. You can't sell the REIT shares without paying those capital gains taxes, but if you can hold the REIT shares until death, the step up in basis will still occur.

#8 Delaware Statutory Trust

Another option for investors with appreciated investment property is to exchange it into a legal entity known as a Delaware Statutory Trust (DST). Technically, individual (not institutional) property owners who want to do an UpREIT exchange have to go through a DST enroute to the REIT. Like a 1031 or a 721 exchange, you're just deferring the taxes until you sell the new thing you exchanged into, but if you're more willing to hold the new thing until death, then you get the step up in basis and completely avoid the capital gains and depreciation recapture taxes.

A DST is a bit like a real estate syndication where dozens of owners own a single institutional-quality real estate asset, like a big apartment complex. Multiple people own the trust, and they all must be accredited investors. Minimum investments tend to be something like $100,000.

#9 Opportunity Zone Funds

Another option for those wishing to defer capital gains is to use an Opportunity Zone (OZ) fund. These showed up originally in 2018 as part of the Tax Cuts and Jobs Act (TCJA), and they were renewed and modified with the One Big Beautiful Bill Act (OBBBA) in 2025. With an OZ fund, you can reinvest money from an appreciated asset (mutual funds, investment property, whatever) into a private real estate fund. That fund buys properties in low-income, rural, or other distressed areas, and in exchange for doing so, the investors in the fund get certain tax benefits. They get to defer the taxes on the previous capital gain for some additional years. Originally, that was until the end of 2026 or whenever the asset was sold, whichever came first. Starting in 2027, it's for five years or until the asset is sold, whichever comes first.

In addition to that deferral (hopefully until a time when you're in a lower long-term capital gains bracket), you get a step up in basis. It's only a partial step up, but every bit counts. Basically, your basis goes up 10% after five years and 15% after seven years, although the 15% step up goes away in 2027.

Additional gains can also be tax-free if you hold the investment for at least 10 years, although that benefit only lasts a maximum of 30 years. Note that the new OBBBA rules mostly go into effect starting in 2027, so it might make sense to wait until then to realize your capital gain.

More information here:

20 Ways to Lower Your Taxable Income for High Earners

3 Big Tax Deductions for Doctors

#10 Deferred Sales Trust

For maximum confusion, both a Delaware Statutory Trust (DST) and a Deferred Sales Trust (DST) have the same acronym and serve similar functions. A Delaware Statutory Trust is like exchanging your single-family home for a part of an apartment complex. The Deferred Sales Trust is really just an installment sale of your property. But you get to write the terms of the installment sale. Maybe it's a lump sum payment in five years. Maybe it's 10% a year for 10 years. But the idea is to defer the taxes due in a way that minimizes the overall tax bill. It follows these steps:

  1. Property owner transfers the property to a trust managed by a third-party company.
  2. Third-party company sells the property. There is no tax bill to the trust for this since its basis is the sales price.
  3. Third-party company leaves the money in cash or invests it inside the trust.
  4. Per the terms of the trust, the third-party company distributes the proceeds to the original property owner, at which point the property owner pays the capital gains and depreciation recapture taxes. It can even be an “interest-only” contract where the property owner NEVER pays capital gains taxes. Of course, that means the property owner can never really use that money, but perhaps it's all legacy money anyway.

Which Option Should I Choose for This Rental Property I Hate?

It's important not to let the tax tail wag the investment dog. You're probably better off figuring out what you'd rather own instead of your investment property and letting that guide your decision. If you want to own a syndicated property, do a DST exchange. If you want to own REIT shares, do a 721 exchange (possibly via a DST exchange). If you want to own a private real estate fund, look at an OZ fund. If you want to own a different rental property, do a 1031 exchange. If you want to own mutual fund shares in a trust you can't touch for a while, do a Deferred Sale Trust. If you just want to quit being a landlord, either just sell it and pay the capital gains and depreciation recapture taxes or hire management until you die and get the step up in basis at death.

The Bottom Line on Capital Gains Taxes

Capital gains are a good thing, even if they usually come with capital gains taxes. Avoiding paying capital gains taxes is possible, but you may be better off just paying them in the first place.

What do you think? Have you done an exchange? Which kind? Why or why not? Why do people hate paying capital gains taxes so much?