Tax Mitigation and Deferral Strategies That Work


Never has there been so much pressure on Washington citizens to pay more in taxes. It seems like the barrage of proposed new taxes and tax rate increases gains more strength with each passing year. Not all the proposals will be implemented, and many will be tried in court, however there is a clear trend in our city halls and state legislature toward increasing the tax burden. Here is a sample of what is currently on the table:

  • Implementing a City of Seattle income tax of 2.25%
  • Implementing a Washington State capital gains tax of 9%
  • Changing the Washington State real estate excise tax to graduated brackets ranging from 0.75% to 2.5%, currently the state tax is a flat 1.28%

In order to alleviate some of the anger invoked in most property owners when they discover their tax bill may, or will increase, we have compiled a list of tax deferral strategies that are worth considering should you decide to sell your investment property.

Sell and 1031 Exchange Your Property

A well-known option, a 1031 exchange allows an owner to defer all tax associated with the sale of investment property other than excise tax. Many owners are under the perception that an exchange must be between two investment properties of the same type – such as a triplex for a triplex. This is not the case. Instead the IRS states the property is considered “like-kind” as long as it is investment property of any sort, regardless of property type. There is quite a bit of flexibility within 1031 exchanges for those who know how to navigate them effectively. There are also quite a few stumbling blocks that can trip investors up while performing an exchange. The benefit to exchanging investment real estate is that if you hold real estate until you or your spouse pass away, you will realize a “step-up in basis,” eliminating all capital gains and depreciation recapture tax liability deferred to that date. Furthermore, the deferred tax can be viewed as an “interest free loan” from the government – allowing you to earn income off your entire investment amount.

Sell and Utilize an Installment Sale

Another commonly presented option is the installment sale. Generally, we do not recommend this approach unless the seller is receiving a premium in the sales price for accepting an installment contract. There are risks associated with this method, such as the buyer’s ability to make the payments promised and the condition of the property should it need to be repossessed. This method spreads out the taxes associated with the sale throughout the life of the installment contract. It should also be noted that there is an unfavorable tax treatment, should the seller pass away during the note payment period. 

Sell and 1031 Exchange Property to be 721 UPREIT

An option we recommend to investors when they may not want to be permanently invested in real estate, value liquidity, and would still like to mitigate tax consequences, is to exchange into a property that will roll into a Real Estate Investment Trust (REIT) after a defined period of time. This approach allows the best of both worlds because the seller is not exposed to the buyer’s performance over multiple years, the exchange dollars will eventually convert to REIT shares in approximately two years’ time, and, most importantly, the seller can then choose to sell their REIT shares as they please – allowing the flexibility to sell when they are in a lower tax bracket or when they need the liquidity.

 Sell and 1031 Exchange into An Eventual New Primary Residence or Vacation Home

Lastly, if a seller is interested in the eventual purchase of a new primary residence or vacation home, they have the option to 1031 exchange into this property using proceeds from the sale of an investment property. This approach allows for repurposing investment real estate equity to personal use real estate; however, it is very important that the newly acquired property (either primary residence or vacation home) be rented out for 1-2 years following the exchange so that it first qualifies for 1031 exchange purposes. The properties do not need to be rented for the entire year, however “personal use” limitations do apply during this 1-2 year period.

Benjamin Franklin once famously wrote, “In this world nothing can be said to be certain, except death and taxes.” Our firm works diligently on behalf of investment property owners to address taxes and make sure real estate transitions (sales, charitable contributions, estate giving, etc.) happen in a tax-efficient manner for our clients. Even with the threat of increased and new taxes looming large, there are strategies we would be pleased to explain further to you, should you be considering a transaction in 2022.

If you have an issue or a concern relating to your investment property ownership, contact Austin Bowlin, CPA and Partner at Real Estate Transition Solutions to schedule a complimentary consultation.  Austin provides exit strategy analysis, execution, income and equity replacement options for investment property owners and can be reached at 206-686-2201 or email him at

The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsors Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee profits or guarantee protection against losses. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor.  This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Securities offered through Aurora Securities, Inc. (ASI), Member: FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a Registered Investment Advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.  

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