No one likes a tax bill, but in the commercial real estate industry, the taxes can be so significant, it upsets your return profile. Capital gains taxes carry a lofty price tag at the sale of an investment, as high as 37% for short-term investments and 20% for long-term investments. The levy is a major concern for the industry, and several commercial real estate advocacy organizations name lowering capital gains taxes as one of their top priorities. While those organizations work toward that goal, there are other options. There are three ways that investors can defer capital gains taxes on an investment. And don’t worry, there are no tricks here: All three of these options are completely sanctioned by the IRS.
A 1031 Exchange
1031 exchanges, also known as a like-kind exchange, is one of the most commonly used tools in commercial real estate. In a 1031-exchange, an investor can transfer the proceeds of a sale—which would otherwise incur a capital gains tax—into the purchase of a new asset. If the sale of an asset generated $1 million profit, for example, the investor could use the $1 million to purchase another property without paying capital gains taxes. In essence, the investor is swapping or “exchanging” one property for another, as the name indicates.
Any owner of an investment property—from individuals, partnerships and LLCs to C-corps and S-corps—qualify for a 1031 exchange, and owners are able to exchange any type of property. There is often a misconception about 1031 exchanges owners must exchange one property for another property with the same profile, as in a mid-sized apartment complex for another mid-sized apartment complex or industrial warehouse for another industrial warehouse. However, there are no restrictions on the type of property exchange. “Like-kind” simply means any real estate asset. Investors are able to trade from multifamily into NNN or retail or office or a hotel. That makes this tool especially useful. Investors are also able to transfer the proceeds into a Delaware Statutory Trust (DST), giving a lot of flexibility to the tool.
An UPREIT
A 721 exchange, also known as an UPREIT, is the lesser-known cousin of a 1031 exchange. In an UPREIT, property owners can transfer real estate property into a REIT portfolio in exchange for operating partnership units, which represent ownership equity in the REIT. After a holding period, investors can convert operating partnership units into shares on a one-to-one basis, and then they can trade them through the public markets. Like a 1031 exchange, this transaction happens without ever triggering capital gains taxes.
An UPREIT deal is a notable opportunity in that it allows investors to transition investment capital from real estate to the liquidity markets without paying taxes. This tool also gives investors the option to transition out of management intensive real estate property or diversify their investment portfolio to align with current economic or business trends or even just change their strategy. It is a useful tool, but many investors don’t even know that it is an option.
There are one-step and two-step 721 exchanges. A one-step exchange is a seamless transaction where a REIT partnership purchases the investment property and “pays” in operating partnership units. The transaction happens similar to any other sale. In a two-step exchange, the investor completes a 1031-exchange into a DST, and then the REIT operating partnership can purchase the DST in exchange for operating partnership units.
An Opportunity Zone Investment
Opportunity Zones are back—and the whole industry is excited. Originally launched under the Tax Cuts and Jobs Act of 2017, opportunity zones are a tax deferral tool intended to encourage investment and development in distressed communities. The July 2025 reconciliation bill permanently extended opportunity zones investments, giving investors and developers the opportunity to use the tool on an ongoing basis.
There are two parts to opportunity zone investments, and each has a different tax advantage. First, investors can invest the proceeds from the sale of any investment into a qualified opportunity zone fund (QOF). By investing in the fund, investors defer capital gains taxes until the fund closes. Second, there is a basis step-up for funds that hold the asset for longer. If the fund holds the investment for at least five years, the investor receives a 10% discount on their tax liability; if the fund holds the investment for seven years, the investor receives a 15% discount on their tax liability. Finally, when a fund holds the investment for 10 years, investors are exempt from paying any capital gains taxes on the proceeds of the opportunity zone investment.
Using one of these tools to defer capital gains taxes opens a lot of doors for investors and developers, providing flexibility to move capital, sell assets and change strategy without incurring a high tax bill. That agility is imperative to success in today’s market. It’s the same agility that developers gain when they leverage modern real estate development software like Northspyre. The technology arms developers with information and tracks project progress to allow investors to make the best decisions in real time and quickly respond to challenges—or even anticipate them before they happen. A complete tool box—whether it’s a tax deferral tool or software, is a gamechanger, and for many investors, it’s an essential component of success.
Book a demo and learn how Northspyre can help your development team deliver predictable outcomes with confidence and ease.
