Year-End Tax Planning Ideas

For many busy households, tax planning often means scrambling to get a return filed by April 15. But in our work with successful clients, real tax planning looks different: it relies on professionals working on your behalf and taking a forward-looking approach.

We recently hosted our annual Year-End Tax Strategies workshop, which highlights the top ten strategies we have seen make a meaningful difference in our clients’ lives, including year-end moves worth considering before the year ends. Read on to learn about one of the newer techniques we have added to the list, because it has produced outsized results for some clients.

How to Defer Tax on Real Estate Gains

This approach focuses on postponing tax on real estate sales, whether the property is a primary residence or an investment. The tax burden on investment property sales remains especially high in Washington state, with the federal capital gains tax reaching 23.8% plus a state tax of up to 9.9%, creating a combined potential tax rate of 33.7%. Not long ago, real estate gains were taxed at roughly 15% to 20%, so the steep increase has led more people to look for ways to reduce what they owe.

Many people know about 1031 exchanges, where a seller can defer tax by properly replacing one property with another of like kind. But there are also other ways to delay the tax, including 721 exchanges, Delaware Statutory Trusts (DSTs), and Tenants-in-Common (TICs) arrangements.

To briefly explain 1031 exchanges: if investors follow strict timing rules, they may defer tax on the sale of a property. They must identify a replacement property within 45 days of the sale or transfer of the relinquished property and complete the purchase of the replacement property within 180 days. In addition, investors cannot take possession of the proceeds, meaning the money cannot be deposited into a personal bank account. Instead, the sales proceeds must be handled by a qualified intermediary, such as an attorney or a company established to facilitate 1031 exchanges.

Although the tax can be delayed, one drawback of 1031 exchanges is that you are usually replacing one time-consuming property with another. Real estate can be a powerful way to build wealth, but it can also require significant time and attention. Many clients eventually reach a point where saving time matters more than maximizing growth. At that stage, they may want to sell real estate and move into something far less hands-on, with income that is more passive. That is the challenge with 1031s: you may defer the tax, but you do not necessarily gain much time back because you still own and manage real estate.

That is where 721 exchanges, TICs, and DSTs can help. Some 1031 exchange solutions include a 721 exchange feature, allowing DST interests to be exchanged for interests in a larger, diversified pool of real estate. These programs use Section 721 of the Internal Revenue Code, and the main advantage is the ability to trade a concentrated stake in a single property for a diversified portfolio of institutional-quality real estate. This lets an investor stay involved in real estate while also pursuing the often more important goal of saving time.

Learn Our Top Tax Reduction Strategies

At Heritage Wealth Advisors, reducing taxes is one of the many ways we help clients get more from their financial resources, and it can produce substantial benefits. While there are often opportunities to lower taxes in the current year, we find we can have much greater control when our advisors and tax specialists work with your CPA to evaluate future tax years and make proactive decisions instead of reactive ones. That approach can mean less stress, fewer missed opportunities, and more of your wealth preserved for the things that matter most.

Our goal with every tax workshop is to encourage clients to spend a relatively small amount of time now building a forward-looking plan, so they can create far more freedom in the years ahead. If you would like to learn more, we are hosting another session of our Year-End Tax Strategies workshop. We will cover the techniques that have produced the biggest positive results for our clients, along with how our team can help you put them into action within your broader financial plan.