The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, introduced sweeping changes to real estate tax incentives and capital gains planning. With enhanced Opportunity Zone (OZ) benefits and restored bonus depreciation, real estate investors must revisit their tax strategies. This article explores updated approaches to managing capital gains from real estate sales in light of the OBBBA.
Key takeaways:
- The OBBBA extends and enhances Opportunity Zone (OZ) benefits, including longer deferral periods and expanded eligibility.
- The OBBBA restores 100% bonus depreciation for qualifying real estate improvements, improving after-tax returns.
- 1031 exchanges remain unchanged, but OZs and bonus depreciation may offer more flexible or advantageous alternatives.
- Consulting with tax, legal, and financial professionals is essential to navigate these evolving strategies.
Many investors have built their wealth through investment real estate. It can provide several tax benefits to investors, as well as cash flow potential and long-term appreciation. But now you’ve sold the property, and you are facing a significant capital gain. Luckily, there are options available to defer the realization of capital gains from the sale of investment real estate: the 1031 like-kind exchange, Delaware Statutory Trusts and Qualified Opportunity Zone Funds. In this article, we will compare and contrast these vehicles so you can make an informed decision regarding the most suitable investment strategy for your specific financial goals.
Investing the proceeds from the sale of investment real estate requires careful consideration to maximize returns and minimize tax liabilities
1031 Like-Kind Exchange
1031 like-kind exchanges have long been utilized as a powerful tax strategy for real estate investors, providing an avenue to defer capital gains taxes and preserve investment gains. Under Section 1031 of the Internal Revenue Code, individuals and businesses can exchange one investment property for another of "like-kind" without triggering immediate tax liabilities on the capital gains.1
One of the primary benefits of engaging in a 1031 like-kind exchange is the potential deferral of capital gains taxes. By reinvesting the proceeds from the sale of an investment property into a like-kind replacement property, investors can defer paying taxes on the capital gains until a future date. This deferral enables individuals to preserve a larger portion of their investment gains and keep funds working in the real estate market, potentially generating further growth and income. Moreover, investors can continually defer taxes by participating in successive 1031 exchanges, allowing for the compounding of investment gains over time. A 1031 like-kind exchange is not without its potential limitations and requirements.
To qualify for tax deferral, the replacement property must be of "like-kind," which generally means it must be a similar type of property used for business or investment purposes. You must also hire a Qualified Intermediary to hold the proceeds of the sale during the transaction and there are strict timeframes to follow. Potential replacement properties must be identified within 45 days of the sale and the acquisition of the replacement property must be completed within 180 days. These time constraints can add pressure to the exchange process and limit the available options. Additionally, any cash or other non-like-kind property received during the exchange may be subject to immediate taxation, reducing the potential tax benefits.
1031 like-kind exchanges allow real estate investors to defer capital gains. Investors can reinvest proceeds into like-kind replacement investment property. Strict timeframes and qualification requirements must be followed
Qualified Opportunity Zone Fund
An Opportunity Zone is a designated geographic area that has been identified by the government as needing economic revitalization. The Tax Cuts and Jobs Act of 2017 established 8,746 of these zones spread across the United States.2 Qualified Opportunity Zone Funds then emerged as an intriguing investment opportunity, offering significant tax incentives for individuals looking to invest in economically distressed communities. A Qualified Opportunity Zone Fund allows investors to deploy capital gains from other investments into these zones, providing potential tax advantages and the opportunity to support community development.
Under the Tax Cuts and Jobs Act of 2017, real estate investors could defer taxes on the sale of their investment property to December 31, 2026, by reinvesting their capital gains in an Opportunity Zone Fund within 180 days of the sale transaction. Under the OBBBA, capital gains taxes can be deferred five years from the date the gains are invested in an Opportunity Zone Fund. In addition to tax deferral, the investor's basis in their Opportunity Zone Fund investment is increased by 10% if held for at least five years. If their investment in the fund is held for at least ten years, the basis of their investment receives a step-up to the fair market value, eliminating the taxable gain.
It is important to consider potential disadvantages or pitfalls associated with Opportunity Zone Funds. One challenge is the complexity of the tax regulations and compliance requirements. Navigating the intricacies of the Opportunity Zone program and ensuring compliance with the various rules and deadlines can be challenging for investors. Additionally, investing in economically distressed areas carries inherent risks, such as uncertain market conditions and potential lack of infrastructure or demand for new projects.
Opportunity Zones offer potential tax advantages and support community development in designated economically distressed areas. Thorough due diligence and professional consultation is necessary due to the complex tax regulations and investment risks
Delaware Statutory Trust
A Delaware Statutory Trust is a legal entity formed under Delaware state law that enables individuals and organizations to own and manage real estate assets. A primary advantage of this vehicle is the ability to diversify investment portfolios and gain access to institutional-grade properties. By pooling funds with other investors, a Delaware Statutory Trust allows individuals to invest in properties that would otherwise be financially out of reach. By using professional asset managers to handle property management and maintenance, it offers passive income potential while relieving investors of the burdensome responsibilities associated with active property ownership.
A Delaware Statutory Trust provides tax advantages through the deferral of capital gains taxes. It can offer passive income potential as professional managers handle property management and maintenance. A Delaware Statutory Trust can also enable investors to diversify their portfolio and access institutional-grade real estate properties
Passive Real Estate Investing with DST Benefits
Investors can utilize a 1031 like-kind exchange from the sale of their investment property into a Delaware Statutory Trust, allowing for the deferral of capital gains taxes. This tax benefit, coupled with the potential for regular income distributions and diversification, makes this an attractive option for those seeking to optimize their tax planning and generate passive income, while maintaining exposure to investment real estate.
Since a Delaware Statutory Trust is managed by professional asset managers, investors have limited input in property management decisions. It typically has a predetermined investment period, meaning investors may have limited liquidity during that time. As with any real estate investment, risks such as market fluctuations, vacancies, and unforeseen expenses can impact the overall returns.
Investing the proceeds from the sale of investment real estate requires careful evaluation of options. With expert guidance, you can optimize tax advantages and diversification while mitigating risk and tax liabilities. Consult with your tax, legal, and financial professionals
Strategic Real Estate Planning in the OBBBA Era
When deciding where to invest the proceeds from the sale of investment real estate, investors should carefully weigh the differences, advantages, and disadvantages of the available options. The 1031 like-kind exchange provides tax deferral and portfolio diversification, while a Delaware Statutory Trust (DST) offers passive investing and diversification benefits. A Qualified Opportunity Zone Fund (QOF), especially under the expanded provisions of the One Big Beautiful Bill Act (OBBBA), provides powerful tax incentives for investing in economically distressed areas—including extended deferral periods and enhanced exclusions.
Investors should consider how these strategies align with broader estate planning goals. The OBBBA’s restoration of bonus depreciation and expansion of Opportunity Zones makes this an ideal time to revisit capital gains planning.
It is essential for investors to consult with tax professionals, financial advisors, and legal experts to assess their unique circumstances and make well-informed decisions. By doing so, they can maximize the benefits of their investment, minimize tax liabilities, and position their portfolios for long-term success.
Act now to take advantage of the OBBBA’s expanded incentives before the window closes.
Connect with a Comerica Wealth Advisor to optimize your real estate capital gains strategy and preserve your legacy.
NOTE: IMPORTANT INFORMATION
Comerica Trust is a unit of Comerica Wealth Management which consists of various divisions and affiliates of Comerica Incorporated, including Comerica Bank, Comerica Bank & Trust, N.A. and Comerica Insurance Services, Inc. and its affiliated insurance agencies. Strategic alliance organizations of Comerica Bank & Trust, N.A. are neither subsidiaries nor affiliates of Comerica Incorporated or Comerica Bank & Trust, N.A. Securities and other non-deposit investment products are not insured by the FDIC; are not deposits or other obligations of or guaranteed by Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of principal invested. Comerica and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your specific situation.
This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Wealth Management does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth Management, including investment banking personnel.
The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general educational/informational purposes only and should not be considered as investment advice or a recommendation for any particular security, strategy or investment product, or as personalized investment advice.