I’m a Real Estate Pro: This Is Why (and How) I’m Deferring My Taxes Until I Die

I’ve chosen to defer my tax payments until I die.That’s not a loophole. It’s not evasion. It’s a sequence of decisions built on top of existing tax code, executed over decades. Depreciation is just half the story. The real game is chaining deferrals across a lifetime so you never pay the recapture — and neither do your heirs.Here’s how the sequence works.The recapture problemWhen you sell a depreciated asset, the IRS collects recapture tax at 25%. If you’ve spent years zeroing out your income through depreciation, the accumulated liability can be enormous. Sell a $10 million property with $3 million of depreciation taken, and you owe $750,000 in recapture alone, plus capital gains tax on any appreciation.Every investor eventually asks: Is there a way to avoid triggering recapture?Yes. Don’t sell.About Adviser IntelThe author of this article is a participant in Kiplinger’s Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.The 1031 exchange: Selling without sellingSection 1031 of the tax code lets you exchange one piece of real estate for another of “like kind” without triggering a taxable event. You use a qualified intermediary who holds the proceeds and transfers them into the replacement property. You never touch the money, so the IRS doesn’t treat it as a sale.”Like kind” is broad for real estate. Apartments for industrial. Retail for ranch land. A duplex for a 50-unit complex. Real estate for real estate.One critical limitation: Since 2017, you can no longer exchange equipment, vehicles, aircraft or boats. You used to be able to swap your yacht for another yacht, your plane for another plane. That’s gone. Real estate is the last category standing.The growth sequenceThe 1031 exchange isn’t a one-time move. It’s a repeatable mechanism for scaling.Buy a 10-unit apartment. Operate it, take depreciation, build equity through appreciation and debt paydown. Exchange into a 20-unit. Then 50. Then 100. Each exchange resets depreciation — you get a new cost segregation study on the replacement property — while deferring all prior gains and recapture.Over a lifetime, this compounds into a large portfolio built substantially with deferred tax dollars.But bear in mind that these properties aren’t mailbox money. Apartments are active businesses with tenants, maintenance, management and capital calls. The tax benefit doesn’t change the fact that you’re running a business.The mineral rights exitAt some point, you get tired of being a landlord.The final 1031 exchange converts real estate holdings into deeded mineral rights. Mineral rights are real property — deeded interests in land — so they qualify for exchange. And unlike apartments, minerals are truly passive: No capital calls, no expenses, no management obligations. Operators drill on your mineral rights and pay you a royalty, typically 10% to 25% of gross revenue. Not profit. Revenue.That’s the endgame. You’ve gone from active apartment operations to passive mineral royalties without ever triggering a taxable event. Maybe you started when you were 30. Now you’re 70. You’ve deferred all of your income and all of your taxes through your entire investing career.And then you die.The generational resetWhen assets pass through your estate — not a trust, and that distinction matters — your heirs receive what’s called a stepped-up cost basis. The IRS revalues the asset at its current fair market value on the date of death, not the original purchase price.Here’s what that looks like. You bought properties over your lifetime for a combined $1 million. Through decades of 1031 exchanges, appreciation and reinvestment, your portfolio is now worth $30 million. You’ve deferred millions in recapture and capital gains. When you die, you and your spouse’s heirs inherit the portfolio at a $30 million basis. The prior $1 million basis is gone. The deferred recapture is gone. The capital gains are gone. Your heirs could sell the entire portfolio the next day and owe zero in capital gains tax.Under the One Big Beautiful Bill Act, the estate tax exemption is now $15 million for individuals and $30 million for married couples, permanently. As long as the total estate is under that threshold, the assets pass to heirs with no estate tax and a full stepped-up basis.Fair warning: Never place 1031 exchange assets into a trust. Assets must remain in the estate to receive the step-up. If they’re in a trust, heirs will inherit the original low basis, and all that deferred recapture comes due. That’s the kind of mistake that undoes decades of planning. Coordinate with your estate attorney and CPA.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.What could changeIt’s worth remembering that none of these provisions is guaranteed forever. Bonus depreciation has survived every administration for 25-plus years, across both parties, but it has changed form repeatedly — 50% versus 100%, new-only versus used, permanent versus temporary. 1031 exchange rules already narrowed in 2017 when equipment exchanges were eliminated. The $30 million estate exemption for married couples is new. The stepped-up basis provision has been a target for reform in multiple past legislative proposals.The strategy works under current law. Build the plan, but keep a pulse on the tax code and be quick to adapt when you must.The full arcThe sequence is straightforward: Earn income, offset with depreciation, 1031 exchange into larger properties, exchange into minerals, hold until death. At no point in this chain does a taxable sale occur. Tax deferral, executed correctly across a lifetime, starts to look a lot like tax elimination.Legally. Across generations.Related Content5 Options for That Stock You Have Too Much Of (Plus, the Risks to Know)What Is Capital Gains Tax Deferral?Don’t Defer Retirement if You’re a Landlord, Defer Taxes Instead10 Ways Your 1031 Exchange Can Go Horribly WrongHow Investing in Oil and Gas Mineral Rights Can Help You Step Off the 1031 Exchange TreadmillThis article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.