📺 Stream EntrepreneurTV for Free 📺

How to Leverage Real Estate Tax-Deferral Strategies to Grow your Business A number of tax trends are occurring in tandem with certain tax-deferral strategies.

By Michael Malakoff Edited by Dan Bova

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.


It goes without saying that, all things being equal, having access to a larger pool of money offers you the chance of greater returns. That's why strategies to defer tax payments are so perennially popular, as a way to grow investments and businesses, larger and faster.

Related: 10 Year-End Smart Tax Strategies for Business Owners

With that in mind, a number of tax trends are attracting renewed attention and should be of interest to you:

  • Real estate owners are transitioning away from the active management of their properties.
  • Real estate investors are looking to diversify their holdings while avoiding an exit tax.
  • Owners or investors are looking for the next project, and not an immediate tax bill.

So, what are the strategies being used in tandem with these tax-deferral trends?

A 1031 exchange

In its most basic form, Internal Revenue Code (IRC) Section 1031 allows owners to exchange one piece of real property for another, without triggering the capital gains tax. By reinvesting in essentially the same type of enterprise, as part of an integrated transaction, owners can defer the tax they would owe on any appreciation in value.

They can also exit out of one particular asset and redeploy their capital into another property of a similar class. This enables them to capture value, take advantage of new opportunities and hedge against potential risks they may see on the horizon.

The sticking points. In order to qualify for a 1031 exchange, "like kind" properties must be acquired and disposed of in accordance with strict rules and in a set time frame. In terms of managing the transaction, you're permitted to proceed in three ways, by making use of either 1) a simultaneous swap, or: employing the following two methods taking place within a defined window of time: 2) a deferred or 3) a reverse exchange, if you identify the property you'd like to purchase first.

What's important to remember here is that unless strict time lines are followed, the entire transaction may be taxed. The basic time frame is listed below. The time line starts from the date of sale, and there are no extensions granted for any reason other than a "federally declared disaster":

  • 45 calendar days to identify potential replacement properties
  • 180 calendar days to purchase and close on the new property (or by the date of filing your next tax return, plus extensions, if earlier).

UPREITS, a real estate "umbrella"

UPREIT stands for "umbrella partnership real estate investment trust." While the term may be puzzling, the main point to remember is that an UPREIT enables you to trade your ownership stake in the real property in question for an operating partnership (OP) or limited partnership (LP) stake in a REIT; this can later be converted to either REIT shares or cash.

Related: 6 Advantages of Real Estate Investing for Savvy Entrepreneurs

It's important to note that receipt of the OP or LP shares isn't considered a taxable event, but tax will be incurred if and when you decide to convert them into REIT shares or cash.

Because REITs are mainly concerned with institutional-quality property, this solution may not be appropriate for all investors. If you're looking to diversify and remove yourself from day-to-day management, however, an UPREIT may be an appealing option and a viable alternative to a 1031 exchange.

A few caveats. Once you're locked into the REIT structure, you no longer retain any control over the sale or disposition of your former property. This could happen at any time, and has the potential to trigger a taxable event, in the form of capital gains or a recapture of any depreciation. And since your ownership is in the REIT rather than in real property, you don't have the option of attempting to defer through an exchange, nor can you exit the UPREIT structure without incurring a tax.

However one positive here is your option to convert your shares gradually so as to lessen the impact and avoid having to pay all at once, as in the event of a sale.

How to decide which is right for you? Consider the following questions in consultation with your tax and legal advisor:

  • Am I ready to relinquish control? If so, are any family members interested in taking up the reins?
  • What is my time line with respect to the life of the exchange? Am I looking at a one-time deferral, or do I envision this being the first of a series of exchanges as I transition in and out of new opportunities.

While there's much more to consider, this overview should provide a starting point for exploration of the potential benefits of these strategies for tax-deferral.

Related: Crowdfunding's Next Hot Frontier: Real Estate

It's important to remember that while these are powerful tools for deferral, they all end the same way: sooner or later, you or your heirs will wind up with a tax bill. As always, it's important to plan these strategies around the long-term goals for both your family and business.

Michael Malakoff

Managing Director, Center for Wealth Impact of Ascent Private Capital Management of U.S. Bank

Michael has more than 15 years of experience in accounting and law. He has in-depth knowledge of wealth transfer, business succession, trust and charitable planning for high-net-worth families and individuals. Immediately before joining Ascent, he was a senior manager at Deloitte Tax LLP in the Private Company Services group. Michael earned his Master of Law in Estate Planning from the University of Miami and his law degree from Nova Southeastern. 

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

These Coworkers-Turned-Friends Started a Side Hustle on Amazon — Now It's a 'Full Hustle' Earning Over $20 Million a Year: 'Jump in With Both Feet'

Achal Patel and Russell Gong met at a large consulting firm and "bonded over a shared vision to create a mission-led company."

Business News

These Are the 10 Most Profitable Cities for Airbnb Hosts, According to a New Report

Here's where Airbnb property owners and hosts are making the most money.

Side Hustle

How to Turn Your Hobby Into a Successful Business

A hobby, interest or charity project can turn into a money-making business if you know the right steps to take.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.


Want to Be More Productive? Here's How Google Executives Structure Their Schedules

These five tactics from inside Google will help you focus and protect your time.

Starting a Business

This Couple Turned Their Startup Into a $150 Million Food Delivery Company. Here's What They Did Early On to Make It Happen.

Selling only online to your customers has many perks. But the founders of Little Spoon want you to know four things if you want to see accelerated growth.