Optimize Tax Strategy: 5 Real Estate Moves Before Year-End
The final months of the year offer real estate investors a valuable opportunity to strengthen their tax position and prepare for the year ahead. With thoughtful planning, you can reduce taxes, boost cash flow, and set the stage for long-term growth. The strategies below outline key actions that property owners should evaluate before December 31 to keep more of what they earn and move into the new year with confidence.
1. Time Your 1031 Exchange Before the Calendar Resets
The 1031 exchange remains one of the most reliable ways to defer capital gains tax when selling investment real estate. But year-end timing adds complexity. Once you close on the sale of your property, you have 45 days to identify replacement assets and 180 days to complete the purchase. A sale in late December often means your deadlines spill into the next year, which can create unexpected reporting issues if the exchange fails or timelines slip.
What to keep in mind
• Closing before year-end starts the clock; be sure you have a plan for your replacement property.
• If an exchange collapses after January 1, the tax bill still ties back to the year of the sale.
• Early preparation avoids rushed decisions and increases the likelihood of successful tax deferral.
Strategic timing can be the difference between a smooth exchange and an unnecessary tax event.
2. Use REITs and UPREITs to Gain Liquidity and Reduce Management Burdens
As investors transition from hands-on real estate to passive income, the UPREIT structure offers a compelling alternative. Through a 721 exchange, property owners can contribute real estate to a REIT’s operating partnership and receive OP units in return, deferring capital gains while stepping into a diversified, professionally managed portfolio.
Why this matters at year-end
• REIT dividends provide predictable income without day-to-day property oversight.
• Shares offer liquidity—an advantage traditional real estate simply cannot match.
• Diversification reduces the concentration risk inherent in single-asset ownership.
For owners considering a shift toward passive, long-term wealth, this can be a timely move.
3. Reduce Your Exposure to Depreciation Recapture
Depreciation recapture often surprises sellers. Even investors who expect favorable long-term capital gains rates can be caught off-guard when depreciation is taxed up to 25 percent at sale. The good news: if the property is part of a 1031 exchange, both capital gains and depreciation recapture can be deferred.
Practical steps before listing or selling
• Review how much depreciation you’ve taken to estimate your exposure.
• Consider structuring the sale as a 1031 exchange, even if your next investment will be passive.
• Evaluate DSTs as potential replacement properties to maintain deferral while transitioning out of active management.
For long-held properties with significant depreciation, this planning can preserve a meaningful amount of capital.
4. Use DSTs to Simplify Your Estate and Provide Passive Income
Many investors reach a point where complexity—not returns—becomes the biggest burden. Multiple properties, management obligations, and lack of liquidity can be difficult for heirs to navigate. A Delaware Statutory Trust can ease this transition while maintaining tax advantages.
Estate-planning advantages
• DST interests divide easily among beneficiaries, unlike physical buildings.
• Your heirs may receive a step-up in basis, potentially eliminating deferred gain altogether.
• Income continues after transfer, without requiring your family to become landlords.
DSTs offer a practical way to transform real estate into a streamlined, income-producing legacy.
5. Prepare for Bonus Depreciation Changes Coming in 2025
Bonus depreciation has been a powerful tool for front-loading deductions, but the phase-down continues. For 2024, the bonus rate is 60 percent and will fall to 40 percent in 2025 unless laws change. This makes year-end planning particularly important for investors considering improvements or new acquisitions.
Moves to consider
• Complete qualifying purchases or improvements before December 31 to capture the current 60 percent rate.
• Consider whether accelerating a project into this year produces more benefit than waiting.
• Work with a tax professional to determine whether a cost segregation study could uncover additional accelerated depreciation opportunities.
The difference in bonus percentages can have a significant impact on your taxable income for the year.
Position Your Portfolio for a Strong Start to Next Year
The final quarter of the year is an ideal time to evaluate your real estate strategy through a tax-efficient lens. Whether you are planning a 1031 exchange, exploring UPREIT options, addressing depreciation recapture, or preparing for changes in bonus depreciation, these decisions can materially improve your financial results.
Since tax planning is highly personal, working alongside your CPA or advisor ensures that your decisions align with your broader goals. If you’d like help analyzing your options or understanding how DSTs, UPREITs, or other structures can support your plan, our team is here to guide you.
