Proven Ways to Defer Capital Gains Taxes

When you sell an asset that has appreciated under your ownership, you may not want to give up some of the wealth you’ve built to capital gains taxes. However, asset and business owners may have legal options for deferring or mitigating the capital gains tax liability from selling their property. At 453 Deferred Sales Trust Powered by Pennington Law, our lawyers help people like you take advantage of these alternatives. Contact us today for a free, no-obligation consultation to learn more about them.

What Do Capital Gains Taxes Entail?

You must pay capital gains tax on the increased value when you sell an asset that has gained value during your ownership. For example, suppose you purchased an asset for $100,000 and sold it for $200,000. In that case, you may owe capital gains tax on the $100,000 profit you made from the sale. However, various tax rules and legal strategies may allow you to reduce the value of your capital gain for taxation purposes or to defer paying capital gains tax.

How Can I Defer the Capital Gains Tax?

A property owner may have several options for deferring capital gains tax imposed when they sell their asset. Some of the most popular methods include the following:

IRC 453 Installment Sales

An IRC 453 installment sales plan takes advantage of the taxation method outlined under Internal Revenue Code 453. IRC 453 allows an asset owner to defer capital gains taxes from selling the asset if they receive payment of the purchase price in installments. The owner pays tax only when they receive payment of principal from the sale proceeds. Thus, IRC 453 installment sales allow asset owners to spread capital gains tax liability from selling their assets over a longer period rather than paying the entire tax in the sale year.

An asset owner may conduct an IRC 453 installment sale in various ways. For example, an owner may finance the asset’s sale, which means the buyer makes monthly, quarterly, or annual payments (with or without interest) to pay off the purchase price over a set period. The owner only pays capital gains taxes on the payments they receive from the buyer in a tax year.

Some asset owners also leverage the taxation method under IRC 453 through a deferred sales trust, which our law firm likes to call “The Tax Tool You Didn’t Know You Had.” That’s because wealthy individuals and families have used deferred sales trusts for years, but many small business owners and high-net-worth investors never knew how deferred sales trusts could also work for them.

A deferred sales trust requires an owner to conduct an asset sale through a bona fide third-party trust. In exchange for placing their asset in the trust, the owner receives an installment payment contract that governs their right to receive payment from the sale proceeds. The trust receives the sale proceeds and
may invest them, paying principal or income to the former owner. The owner pays capital gains tax only when the trust distributes the principal from the sale proceeds.

1031 Exchanges

Business or investment real estate owners can defer capital gains taxes when selling their property through 1031 exchanges. In a 1031 exchange, a property owner “exchanges” one property for another through a qualified intermediary, who holds the proceeds from the sale of the old property for the owner to buy a new property.

A 1031 exchange requires a property owner to reinvest the sale proceeds from their old property into a “like-kind” asset, usually another parcel or real estate interest of equal or greater value. Furthermore, 1031 exchanges have strict timing requirements for identifying the new property to purchase and purchasing that property.

Charitable Contributions

An asset owner may make charitable contributions in the same year they sell their asset to offset capital gains tax from the sale. Qualifying charitable contributions may entitle a taxpayer to tax credits that can reduce their overall tax liability.

Tax-Loss Harvesting

The tax-loss harvesting strategy involves selling various investments at a loss to offset capital gains from selling other assets. However, tax-loss harvesting has several limitations. For example, a taxpayer cannot use short-term losses to offset long-term gains or vice versa. Furthermore, investors cannot use a loss to
offset capital gains if they repurchase the investment they sold for a loss within 30 days.

Qualified Small Business Stock (QSBS)

Federal tax law allows holders of qualified small business stock (QSBS) to exclude potentially up to 100 percent of capital gains from selling the stock from taxation when a holder meets specific requirements. For a company to issue QSBS, it must meet specific eligibility criteria, including the following:

• The company must have issued the stock after August 10, 1993
• The company must be structured as a C-corporation
• The company must have aggregate gross assets of $50 million or less immediately following the issuance of the stock
• The company must use at least 80 percent of its assets in trade or business
• The company must not engage in specific trades or industries, such as

o Medicine
o Law
o Engineering
o Architecture
o Accounting
o Actuarial services
o Performing arts
o Consulting
o Finance
o Banking
o Insurance
o Leading investing
o Brokerage
o Athletics
o Farming
o Production of products like fossil fuels, for which the company can claim a percentage depletion
o Operating hotels, motels, inns, or restaurants

•  The company must not have had 5 percent or more of the aggregate value of its outstanding shares redeemed in the two years before the issuance of QSBS

Furthermore, holders of QSBS must meet eligibility criteria as well, including the following:

• Acquiring the stock in exchange for money, property (other than stock), or services
• Holding the stock for at least five years before selling it
• Not having more than a minimal amount of their stock repurchased by the issuing company two years before or after the issuance of the stock

The percentage of capital gains tax excluded from a sale of QSBS depends on when the holder received the stock, ranging from 50 percent with a 7 percent alternative minimum tax add-back to 100 percent with no AMT add-back. Furthermore, a QSBS holder may only exclude up to the greater of $10 million or 10 times the adjusted basis of the shares.

While most states that impose state capital gains tax follow federal taxation rules for QSBS, a handful of states that tax capital gains do not follow the federal rule or only offer a partial exclusion of capital gains tax.

Timing the Sale of Your Property

An asset owner may time the sale of their asset to take advantage of more favorable tax conditions, such as selling in a year in which their income falls under the threshold that would trigger the 20 percent capital gains tax rate or in a year in which they’ve made charitable contributions or incurred capital losses that could offset capital gains tax.

Turning the Property into a Primary Residence

When you’ve invested in real estate, you can defer some of the capital gains tax from selling the property by making it your primary residence. Federal tax law provides an exclusion of capital gains tax on the sale of a primary residence of up to $250,000 ($500,000 for a homeowner who files a joint return
with their spouse).

To qualify for the exclusion, a property owner must meet the ownership and use tests. The ownership test requires the owner to have owned the property for at least two of the last five years before the sale. The use test requires the owner to have used the property as their primary residence for at least two of the last five years before the sale. An owner may meet the ownership and use tests in two different two-year periods in the five years preceding the sale.

A homeowner or their spouse who goes on qualified official extended duty with the Uniformed Services, Foreign Service, or intelligence community can suspend the five-year test period for up to 10 years. Finally, a homeowner may not use the exclusion if they’ve used it for another property sale within the past two years.

The 10% to 12% Tax Bracket

Federal tax law exempts taxpayers in the 10 percent and 12 percent tax brackets for ordinary income taxes from paying long-term capital gains tax. As of 2025, taxpayers who fall into the 10 percent and 12 percent tax brackets include:

• 10 Percent – Income of $11,925 or less for single taxpayers or married taxpayers filing separately, $23,850 or less for married taxpayers filing jointly, or $17,000 or less for taxpayers filing as head of household
• 12 Percent – Income of more than $11,925 up to $48,475 for single taxpayers or married taxpayers filing separately, more than $23,850 up to $96,950 for married taxpayers filing jointly, or more than $17,000 up to $64,850 for taxpayers filing as head of household

Are There Any Requirements I Should Know About the Capital Gains Tax Beforehand?

Property owners should familiarize themselves with federal capital gains tax rules. For example, federal tax law has different tax brackets for short-term and long-term capital gains, defined as gains from an investment held for a year or less or more than a year, respectively. The IRS taxes short-term capital gains at the taxpayer’s ordinary income tax rate. However, taxpayers will pay a zero, 15, or 20 percent tax on long-term capital gains, depending on their income. Furthermore, certain types of investments have different long-term capital gains tax rates.

How Can a Lawyer from 453 Deferred Sales Trust Powered by Pennington Law Help?

An attorney from 453 Deferred Sales Trust Powered by Pennington Law can help you pursue strategies for deferring capital gains taxes on a property sale by:

• Reviewing your financial situation and the details of your contemplated asset sale to evaluate your legal options for managing capital gains taxes
• Walking you through your options to help you make an informed choice between strategies
• Setting up legal structures as necessary to put your plan for deferring or reducing capital gains tax into effect

Contact Our 453 Deferred Sales Trust Lawyers Today

Before you sell an asset, talk to an experienced attorney about legal strategies that may help you mitigate or defer capital gains taxes on the sale. Contact 453 Deferred Sales Trust Powered by Pennington Law today for a free initial consultation with our national lawyers to discuss your options.