How to Divest Real Estate Tax-Free: A Smart Investor’s Guide


Investing in real estate has long been considered a lucrative venture, providing a stable income stream and the potential for substantial capital appreciation. However, as an investor, there may come a time when you decide to divest your real estate holdings for various reasons, such as portfolio diversification, retirement planning, or seizing new investment opportunities. When divesting, minimizing tax liabilities is a crucial consideration.

Learn How To Divest Your Real Estate Holdings Tax-Free

Utilize a 1031 Exchange

One of the most powerful tools available to real estate investors for tax-free divestment is the 1031 exchange, also known as a like-kind exchange. Section 1031 of the Internal Revenue Code allows investors to defer capital gains taxes when they sell a property and reinvest the proceeds in a similar “like-kind” property. By doing so, you can effectively roll over your investment into a new property without triggering immediate tax obligations. This strategy allows you to preserve your capital and continue growing your real estate portfolio.

Delaware Statutory Trust

Delaware Statutory Trusts (DSTs) are an excellent option for investors seeking a more passive approach to real estate ownership while diversifying their portfolios. DSTs are a legal entity that allows multiple investors to pool their funds and invest in a single property. This structure grants individual investors proportional ownership of the property, thereby enabling them to enjoy rental income and potential property appreciation without the responsibilities of active property management.

One of the primary benefits of DSTs is their compatibility with 1031 exchanges. By using the proceeds from the sale of their original property to invest in a DST, investors can fulfill the requirements of the 1031 exchange and continue deferring taxes while enjoying the advantages of passive real estate ownership.

Invest in Opportunity Zones

Another tax-efficient way to divest real estate is by investing in Opportunity Zones (OOZs). Established as part of the Tax Cuts and Jobs Act of 2017, QOZ’s are designated economically distressed areas aimed at attracting private investment through tax incentives. When you sell a property and reinvest the gains into an Opportunity Zone property, you can defer, and in some cases, reduce the capital gains taxes on your initial investment.

The initial capital gains tax on the original investment is deferred until the QOZ investment is sold or by December 31, 2026, whichever comes first. If the investment is held for at least five years, there’s a 10% reduction in the deferred tax amount, and if held for seven years, the reduction increases to 15%. Moreover, any capital gains generated from the appreciation of the QOF investment held for ten years or more become entirely tax-free.

By combining the 1031 exchange with Qualified Opportunity Zones, investors can potentially amplify the tax benefits and enhance their impact on disadvantaged communities.


Divesting real estate tax-free is an achievable goal with careful planning and execution. By leveraging tax-advantaged strategies such as a 1031 exchange, Delaware Statutory Trusts Qualified Opportunity Zones, you can preserve more of your profits and navigate the complexities of the tax code successfully. Always consult with qualified tax advisors and real estate professionals to tailor these strategies to your specific financial situation and investment goals. With the right approach, you can confidently divest your real estate holdings while maximizing your financial gains and minimizing tax burdens. Happy investing!

Interested in tax-free real estate divestment? Take control of your taxes today! Learn from our Smart Investor’s Guide or call us to get one-on-one advice!

Voss Real Estate Advisors

August 8, 2023

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