Short answer
A standard 1031 exchange into another building you own directly is not the only way to handle a large real estate gain. The planning starts before the sale. Two strategies, tax-loss harvesting in your investment portfolio and intangible drilling cost (IDC) deductions from oil and gas programs, work only if they fall in the same tax year as the gain, and several post-sale options must be arranged before a contract is binding.
After the sale, the main alternatives to a traditional exchange are:
- exchanging into a Delaware Statutory Trust (DST);
- contributing property to a REIT’s operating partnership in a 721 exchange (UPREIT);
- investing the gain in a Qualified Opportunity Fund;
- spreading the gain over time with an installment sale;
- selling through a charitable remainder trust; or
- paying the tax and keeping full control of the proceeds.
Each one handles the tax differently, and each has its own costs, risks and limits on liquidity and control. None of them suits everyone. The right choice depends on the property, the size of the gain, your income needs, your estate plan and how long you can leave money untouched.
Plan before the sale
Ideally, look at a large gain before the closing date is set. Some tools only work in the same tax year as the gain. Others have to be in place before a sale is binding. Two categories are worth discussing with your CPA early.
| Before-the-sale strategy | What it can do | Main risks and limits |
|---|---|---|
| Tax-loss harvesting | Realizes losses in a taxable portfolio that can offset capital gains in the same year | Wash-sale rule; only taxable accounts; replacement holdings carry a lower cost basis; tax should not drive investment choices |
| IDC deductions (oil and gas programs) | A deduction, largely in the year you invest, that may lower this year’s taxable income | Speculative; illiquid private placement; commodity and drilling risk; recapture on sale; yearly cap; accredited investors only |
Tax-loss harvesting before a gain event
Tax-loss harvesting means selling investments in a taxable account that are worth less than you paid for them, so that the loss is realized for tax purposes. Realized capital losses generally offset realized capital gains in the same tax year, including a gain from selling property or a business. If losses are larger than gains, up to $3,000 of the excess ($1,500 if married filing separately) can generally offset ordinary income each year, and the rest carries forward to future years. Losses carried forward from earlier years may also be available; your CPA can confirm.
Losses realized at any point in the tax year of the sale count, but reviewing the portfolio before the sale gives you and your advisor more time to find them and to keep the portfolio’s overall allocation intact.
The wash-sale rule. A loss is disallowed if you buy the same or a “substantially identical” security within 30 days before or after the sale that produced the loss. The rule looks across your accounts, including IRAs and, generally, a spouse’s accounts. A disallowed loss is usually added to the cost basis of the new shares, so it is postponed rather than lost. A repurchase inside an IRA is different: the loss is generally lost for good. Many investors replace a sold holding with a similar but not substantially identical investment, or wait more than 30 days.
What to weigh: harvesting only helps when a taxable account holds positions below cost. It lowers the cost basis of the replacement holdings, so it generally defers tax rather than removing it. Selling and replacing positions can change the portfolio’s risk, and trading has costs. The tax result should not override the investment decision. Short-term and long-term gains and losses are netted under ordering rules, and depreciation recapture on real estate is taxed at its own rate, so the actual offset depends on the details of your return. Consult your tax advisor.
Read more: Tax-loss harvesting
Intangible drilling cost (IDC) deductions from oil and gas programs
Congress has long given special tax treatment to investors who help pay for new oil and gas wells. In a drilling program, an investor is one of many paying to drill new wells. Drilling costs are spent on labor, rigs, fuel and other costs that have no resale value. Drilling costs (“intangible drilling costs”) are usually the largest part of the investment and can generally be deducted in the year paid, not spread over many years. When held as a “working interest,” the loss is not treated as passive, so it may offset salary, bonuses and business income, not only other investments.
Why it relates to a big income year: because the deduction falls largely in the year you invest, it may lower that year’s taxable income, which is why some investors with an unusually high-income year (a bonus, business sale or large gain) look at it. A net business loss can offset only about $512,000 of other income such as capital gains in 2026 on a joint return (about $256,000 for single filers). Anything above the cap is not lost: it carries forward to future years. For a calendar-year taxpayer, the program is funded in the tax year you want the deduction, and prepaid costs generally count if drilling begins within 90 days after year-end. This is how the tax rules work, not a deadline to act.
What to weigh:
- It defers tax; it does not erase it. The deduction lowers your cost basis. If you later sell your interest, the earlier deduction is generally taxed back as ordinary income (“recapture”).
- The investment can lose money, including all of it. Wells can be dry and oil and gas prices can fall. The tax deduction is worth only a fraction of what you invest; it is not a return on your money.
- Your money is tied up for years. These are private placements with no public market. Plan on not being able to sell or get your money back early.
- Accredited investors only. These programs are for accredited investors only, and only money you could afford to lose entirely belongs in them.
- Other rules still apply. Basis and “at-risk” rules, the alternative minimum tax, and state income tax (Texas has none) can change the result. During drilling, investors are often general partners, which carries added liability.
Whether any of this fits your situation is a question for you and your CPA.
Read more: Intangible drilling cost deduction · IDC glossary · IDC deduction timing in 2026 · IDC deduction estimator
Decisions that must be made before closing
Some of the post-sale options below also have to be set up before the sale: a 1031 exchange (including into a DST) needs a qualified intermediary in place before closing, a charitable remainder trust generally needs the gift completed before a sale is binding, and an installment sale is written into the sale contract. The FAQ at the end of this page lists which options can still be decided after closing.
After the sale: six alternatives to a traditional 1031 exchange
Why look beyond a traditional 1031 exchange?
A traditional 1031 exchange works well for many owners. People look at the alternatives when:
they want to stop managing property, cannot find a replacement within 45 days, want some cash out (taxable boot in an exchange), have a gain that is not from real estate, have charitable goals, or simply value liquidity more than deferral. The table summarizes the six categories.
| Path | What happens to the tax | Liquidity and control | Main risks and limits |
|---|---|---|---|
| DST (via 1031) | Gain deferred | Illiquid; no control; sponsor sets the exit | Private placement; distributions not guaranteed; loss of principal possible; fees; accredited investors only |
| 721 exchange (UPREIT) | Contribution generally deferred; ends future 1031 use | Units may be redeemable over time, with limits | REIT and market risk; redemptions limited and can be suspended; later conversion is taxable |
| Opportunity Zone fund | Gain deferred for a period; potential exclusion of fund appreciation after long holds | Very illiquid; long hold | Speculative; development risk; complex rules; the deferred gain is still taxed |
| Installment sale | Gain recognized as payments arrive | Depends on the buyer paying | Buyer default; recapture taxed up front; interest is ordinary income; special rules on large sales |
| Charitable remainder trust | Trust generally pays no tax on the sale; donor taxed on payments received | Irrevocable; income stream, not principal | Remainder goes to charity; complex to set up; must be arranged before a sale is binding |
| Pay the tax | Gain taxed in the year of sale | Full liquidity and control | Largest up-front tax; no deferral |
1. Delaware Statutory Trust (DST)
A DST is still a 1031 exchange. The replacement property is a fractional beneficial interest in a trust that owns institutional real estate, instead of a building you own directly. Under IRS Revenue Ruling 2004-86, a properly structured DST interest can qualify as like-kind property.
Why people consider it: passive ownership, offerings usually ready to identify within 45 days, built-in debt that can help with debt replacement, and the ability to spread proceeds across properties.
What to weigh: DSTs are illiquid private placements, generally for accredited investors only. Investors have no vote, the sponsor decides when to sell, distributions are not guaranteed, fees are built in, and principal can be lost. The gain is deferred, not removed.
Read more: Delaware Statutory Trusts and the 1031 exchange · DST vs. NNN · DST vs. TIC
2. 721 exchange (UPREIT)
Section 721 of the Internal Revenue Code generally allows property to be contributed to a partnership in exchange for a partnership interest without recognizing gain. In an UPREIT, the partnership is the operating partnership of a real estate investment trust (REIT), and the owner receives operating partnership units. Most REITs accept only properties that fit their portfolio, so individual owners more often reach a 721 exchange in two steps: first a 1031 exchange into a DST, then a later contribution of the DST’s property to the REIT’s operating partnership, if the sponsor has that option.
Why people consider it: exposure to a larger real estate portfolio, possible liquidity over time, and simpler estate division.
What to weigh: a 721 contribution generally ends the ability to do future 1031 exchanges with that investment. Converting units to REIT shares, or redeeming them, is a taxable event. Many of the REITs involved are not traded on an exchange, so redemptions are limited, are at the REIT’s discretion, and have been reduced or suspended at times. The value of the units goes up and down with the REIT.
Read more: DST vs. 721 exchange (UPREIT) · 721 exchange glossary
3. Qualified Opportunity Zone fund
An Opportunity Zone investment works differently from a 1031 exchange. You do not reinvest the whole sale price. You invest only the gain, within 180 days, in a Qualified Opportunity Fund that invests in designated low-income census tracts. The gain can come from almost any source, including stock or a business sale, not only real estate.
How the tax works under current law: the rules were rewritten for investments made after December 31, 2026. For those investments, the deferred gain is generally recognized at the earlier of a sale of the fund investment or five years after the investment. At five years, the basis increases by a portion of the deferred gain (ten percent, or thirty percent for a qualified rural fund). If the investment is held for at least ten years, the investor may elect a basis equal to fair market value when it is sold, which can exclude the appreciation earned inside the fund from tax. That election has an outer limit of thirty years. Investments made under the original program follow different dates.
What to weigh: Opportunity Zone funds are generally speculative, illiquid private placements, often in development projects, and may need a long hold. The deferred gain itself is still taxed, and you need cash to pay that tax when it comes due. The fund must meet ongoing tests to keep its status. The original principal (the part of the sale proceeds that was not gain) gets no benefit.
Read more: Opportunity Zone 2.0: the new rules · 1031 vs. Opportunity Zone · Opportunity Zone calculator
4. Installment sale
Under Section 453, a seller who receives at least one payment after the year of sale can generally report the gain as the payments arrive, instead of all at once. The simplest version is seller financing: the buyer pays part of the price at closing and the rest over time, with interest.
Why people consider it: spreading the gain across tax years may keep more of it in lower brackets, and seller financing can help close a sale with a buyer who cannot get full bank financing.
What to weigh: the seller now carries the buyer’s credit risk, and if the buyer defaults, foreclosure can be slow and costly. Depreciation recapture is generally taxed in the year of sale, whether or not it has been received in cash. Interest is taxed as ordinary income. Sales to related parties, and very large installment balances, fall under special rules that can reduce or remove the benefit. Some marketed variations of installment selling involve third-party trusts or intermediaries and have drawn IRS attention. Review any such structure with your own CPA and attorney.
5. Charitable remainder trust (CRT)
A charitable remainder trust is an irrevocable trust. You give appreciated property to the trust before a sale is agreed. The trust then sells it. Because a qualifying CRT is generally exempt from income tax, it does not pay tax on the sale and can reinvest the full proceeds. The trust pays you (or you and a spouse) an income stream, either a fixed amount (an annuity trust) or a fixed share of the trust’s value each year (a unitrust), for life or for a term of up to twenty years. When the term ends, what remains goes to the charities you chose.
Why people consider it: a charitable goal combined with an income stream, a partial income-tax deduction in the year of the gift, and a way to diversify out of one highly appreciated asset.
What to weigh: the gift is permanent: you give up the principal, and your heirs do not receive it. Payments to you are taxed under ordering rules that can treat much of each payment as capital gain. The trust must meet IRS payout and remainder-value tests, mortgaged property is difficult to contribute, and if a binding sale agreement exists before the gift, the IRS may tax the gain to you anyway. A CRT needs an attorney to draft it and a trustee to run it.
6. Paying the tax
Sometimes the right alternative is the simplest: sell, pay the tax and keep full control of what remains. The federal rate on long-term capital gains is up to twenty percent, with the 3.8 percent net investment income tax on top for higher incomes. The part of the gain that comes from depreciation is taxed at up to twenty-five percent. Texas has no state income tax, but most other states tax capital gains.
Why people consider it: full liquidity and control, no deadlines, no private placement risk or fees, and a decision finished in one tax year.
What to weigh: the up-front tax is the largest of the six options, and the money paid in tax is no longer invested. For an owner who intends to hold real estate until death, deferring may matter more under current basis rules.
Read more: 1031 exchange vs. paying the tax · Capital gains tax calculator · Depreciation recapture calculator
How to choose: questions to answer first
Before comparing products, answer these about your own situation, ideally together with your CPA and attorney:
- Is the gain from real estate? If not, a 1031 exchange, a DST and a 721 exchange do not apply.
- Do you want to stay in real estate?
- When might you need the money? DSTs, Opportunity Zone funds and charitable trusts tie up capital for years.
- How much control do you want? Direct ownership and paying the tax keep it. DSTs, UPREITs and CRTs give most of it up.
- What is the estate plan? Holding until death, giving to charity and dividing assets among heirs all point in different directions.
- Are you an accredited investor, and would this be a sensible share of your net worth? Several of these paths are private placements limited to accredited investors, and suitability is a separate question from eligibility.
- Is the sale already under contract? Charitable trusts, and some installment structures, generally have to be in place before a sale is binding. The paths can also be combined, for example a partial exchange plus an installment note.
How Grace Capital Management helps
We are an independent, Austin-based hybrid RIA. We are not a sponsor of any of these investments. Our role is to help you compare the categories against your own goals, and then to coordinate with your CPA, attorney and qualified intermediary on the one you choose, including the option of simply paying the tax. Schedule a conversation before your sale closes, while every option is still available.
Frequently asked questions
What are the main alternatives to a 1031 exchange?
Exchanging into a DST, contributing property to a REIT through a 721 exchange, investing the gain in a Qualified Opportunity Fund, an installment sale, a charitable remainder trust, or paying the tax.
Can I avoid capital-gains tax completely when I sell investment property?
Most of these strategies defer or spread the tax rather than remove it. Under current law, two situations can remove some of it: appreciation inside an Opportunity Zone fund held for at least ten years, and the basis adjustment heirs generally receive at death. A charitable remainder trust moves the sale into a tax-exempt trust, but the donor is taxed on the payments received and the remainder goes to charity.
What is the difference between a 1031 exchange and an Opportunity Zone investment?
A 1031 exchange requires reinvesting the full proceeds in like-kind real estate within 180 days. An Opportunity Zone investment requires reinvesting only the gain, from almost any source, in a Qualified Opportunity Fund within 180 days. The tax treatment and holding periods differ.
Does a 721 exchange end my ability to do future 1031 exchanges?
Generally yes. Once property is contributed to a REIT's operating partnership, the units you receive are partnership interests, not real estate, and further 1031 exchanges with that investment are generally no longer available.
Can tax-loss harvesting offset a gain from selling property?
Generally, yes. Capital losses realized in a taxable investment account during the same tax year can offset capital gains, including a gain on real estate or a business. The wash-sale rule disallows a loss if a substantially identical security is bought within 30 days before or after the sale. Depreciation recapture and ordering rules affect the result, so review the numbers with your CPA.
How do intangible drilling cost (IDC) deductions relate to a large-income year?
In an oil and gas drilling program, intangible drilling costs can generally be deducted largely in the year you invest. Held as a working interest, the loss is not treated as passive, so it may offset other income, within a yearly cap. The deduction is generally taxed back as ordinary income if you sell your interest, and the investment itself is speculative, illiquid and limited to accredited investors.
Do I have to decide before the sale closes?
For some options, yes. A 1031 exchange needs a qualified intermediary in place before closing. A charitable remainder trust generally needs the gift completed before a sale is binding. An installment sale is set in the sale contract. An Opportunity Zone investment and paying the tax can be decided after closing, within their own time limits.