Can You Avoid Capital Gains Tax Without a 1031 Exchange?

The 1031 like-kind exchange rules allow businesses and investors to indefinitely defer capital gains tax on qualifying real estate transactions. A 1031 exchange is an extremely valuable tool, and savvy business owners and investors routinely use these exchanges to avoid unnecessary tax liability. But, what if a property doesn’t qualify? Or, what if a proposed exchange involves taxable “boot”? Find out what you need to know from our 1031 exchange specialists.

3 Options for Avoiding Capital Gains Tax Without a 1031 Exchange

While conducting a 1031 exchange is the primary way to avoid (or indefinitely defer) capital gains tax liability when selling real estate, there are other options available. Similar to 1031 exchanges, however, these options are only available in certain circumstances:

1. Installment Sales

When the transaction is structured properly, conducting an installment sale allows for the temporary deferral of capital gains tax liability. This is achieved by specifying that the buyer’s initial payments cover interest only—not principal. Generally speaking, for as long as a seller is receiving interest-only payments, the seller’s capital gains tax liability is deferred.

While installment sales (which are governed by Section 453 of the Internal Revenue Code) are not subject to the same qualifying restrictions as like-kind exchanges under Section 1031, other restrictions apply. As a result, before pursuing an installment sale, it is critical to ensure that this is a viable option under the circumstances at hand.

2. Qualified Opportunity Funds

As the Internal Revenue Service explains, “[t]axpayers who invest in Qualified Opportunity Zone property through a Qualified Opportunity Fund can temporarily defer tax on the amount of eligible gains they invest.” Qualified Opportunity Zones are identified in IRS Notice 2018-48 and IRS Notice 2019-42.

Investing in a Qualified Opportunity Fund is currently only an option until December 31, 2026, and here, too, strict requirements and restrictions apply. These include a 180-day reinvestment deadline, among others. As the IRS also explains, “[t]he amount of time you hold the Qualified Opportunity Fund investment determines the tax benefit you receive.” While a taxpayer’s basis in a Qualified Opportunity Fund starts at zero, this basis increases over time—impacting the taxpayer’s potential capital gains tax liability at the time of sale.

3. Estate Tax Exemptions and Charitable Deductions

Taxpayers who own real estate and other high-value assets may be able to avoid (or at least minimize) potential federal income tax liability by transferring these assets through their estate or by making charitable contributions. The federal estate tax exemption is nearly $14 million as of 2025, and high-income taxpayers may be able to use charitable deductions to significantly reduce (if not eliminate) their income tax liability as well.

Determining if a Real Estate Transaction Qualifies Under Section 1031

Before pursuing an alternative to a 1031 exchange, however, it is important to ensure that this is the best option under the circumstances at hand. Even when these alternatives are available, it may still be most advantageous to conduct a 1031 exchange. Here are some key considerations:

The Definition of “Like-Kind” Properties Under Section 1031 is Broader than Many People Realize – While Section 1031 only provides indefinite deferral for like-kind exchanges, the definition of “like-kind” properties is broader than many people realize. Under Section 1031, just about any piece of real property can be exchanged with any other, as long as they are both located in the United States or both located in a foreign country.
Primary Residences, Second Homes and Vacation Homes Can Be Transformed Into Investment Properties Under Section 1031 – While primary residences, second homes and vacation homes generally don’t qualify under Section 1031, property owners can take steps to transform these properties into “investment properties” for purposes of conducting a 1031 exchange.
Delayed, Reverse and Improvement Exchanges Provide Greater Flexibility for Qualifying Under Section 1031 – Conducting a 1031 exchange does not have to involve selling one property and buying another simultaneously. Delayed, reverse and improvement exchanges are three commonly-used options that provide businesses and investors with much greater flexibility for securing indefinite tax deferral.

Schedule a Free Consultation with One of Our 1031 Exchange Specialists

At 1031 National Services, we rely on decades of experience to help businesses, investors and other property owners make informed and strategic decisions about mitigating their federal capital gains tax liability. If you have questions, we invite you to get in touch. To speak with one of our 1031 exchange specialists in confidence, give us a call at 888-872-1031 or request a free consultation online today.