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4 Tips for Tax-Efficient Investing

The biggest threat to the average investor’s gains isn’t risk or even a sudden downturn — it’s the tax man.

Whether you barely break even, or make a killing investing in the top dividend-paying stocks, you’ll have to give the IRS a cut. Even your retirement fund is taxed.

Although, with some smart investing, you can minimize your tax exposure. In a world where there’s no such thing as tax-free investing, the best you can hope for is tax-efficient investing. Let’s look at some of the best ways to lower your tax bill.

Traditional IRAs, Roth IRAs, and 401(k) plans can radically reduce your present and future tax liability.

Put money into tax-efficient accounts like IRAs and 401(k) plans

Let’s start with a simple one. Using traditional IRAs, Roth IRAs, and 401(k) plans to save for retirement can radically reduce your present and future tax liability.

Putting money into a traditional IRA is done pre-tax, which reduces your current tax bill. Roth IRA and Roth 401(k) contributions are made post-tax, which means future withdrawals won’t be taxed.

Another way to look at it is that traditional IRA withdrawals will be taxed at your future tax rate, which could be lower than the one you’re paying when you make the contributions. On the other hand, future Roth IRA withdrawals are tax-free, but the contributions have been taxed at your current rate. Deciding which one is more tax-efficient for you is going to depend on your personal earning trajectory, your retirement strategy, and other financial considerations.

Just remember — your annual contributions to each kind of account are capped at a certain amount, so talk to a financial advisor or tax professional when you’re planning your tax strategy.

Hold investments long enough to avoid short-term capital gains

Any investment you hold for a year or less is going to be taxed as short-term capital gains, which are treated like personal income — and can be taxed as high as 37%. However, if you simply hold on to the investment longer than a year, it will be taxed as long-term capital gains, at a rate of 0%, 15%, or 20% depending on your income.

Of course, this may not always be a viable strategy. For example, house flippers often work on razor-thin margins, relying on techniques like home buyer rebates to cut down their initial outlays, and comparative market analyses to nail their list price for a fast sale.

Urgent investments aside, anything you can hold onto long enough to convert to long-term capital gains is going to save you a lot of money.

State 1031 exchange regulations make Colorado one of the safest states to do exchanges

Use a 1031 exchange to defer your capital gains tax bill

Let’s say you bought an investment property a decade ago, and it’s doubled in price over the years. If you sold outright, you’d owe capital gains tax on the appreciated value, which would eat up a sizable chunk of your profits.

A 1031 exchange would allow you to take the proceeds from your initial sale and use them to purchase another like-kind property while deferring capital gains. The best part is that you can use a 1031 exchange repeatedly, upgrading your properties each time until you’ve built a mini real estate empire without paying a cent in capital gains. When you liquidate your holdings, your capital gains taxes will come due, but that could be decades from now — and by then, your net worth will have grown immensely.

A 1031 exchange does have a few pretty strict rules. The exchange has to be executed within a narrow time window (generally 90 days), and the exchange itself has to be handled by a third-party qualified intermediary so you never technically have ownership of both properties.

The rules governing a 1031 exchange vary from state to state. The good news for Colorado investors is that state 1031 regulations make Colorado one of the safest states to do exchanges in, as state law outlines strict financial requirements for qualified intermediaries and how they handle your money.

Use your investment losses to offset your gains

Taxpayers can use up to $3,000 of losses per year to offset their gains. Let’s say your investments gained $5,000 in value last year, but you took a lot of losses, too. You can use $3,000 in losses to reduce your taxable income to only $2,000 — saving you a lot in taxes, especially if some of those profits were short-term capital gains (which are taxed at income tax rates). If you have more than $3,000 in losses in a single year, you can also apply those losses in subsequent years.

Some investors will intentionally sell at a loss — a practice called “tax loss harvesting” — to offset gains that are subject to high tax rates. Before you undertake this strategy, consult with a financial advisor to find out if it makes sense for you. Investing is all about managing risk, and sometimes those hot stock tips don’t work out. But there’s a silver lining to your losses — you can use them to reduce your income tax liability.


Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.

Capping 1031 exchanges threatens ability to reinvest in minority communities

Business,property,real,estate,and,investment,concepts,with,investor,and,whiteA critical investment tool which has been central to the rebuilding of our American economy – especially in diverse communities – is at serious risk as a provision in the $1.8 trillion American Families Plan is under consideration in Washington, DC. 

The proposed cap on 1031 exchanges at $500,000 included in the plan is shortsighted and counterproductive. A cap on 1031 exchanges right now would severely restrict the ability and willingness to reinvest in commercial real estate and redevelop properties at a time in our nation’s economy when eager, courageous, and committed investors are needed more than ever. 

IRC 1031 like-kind exchanges have allowed investors to defer taxes on the sale of a property if the proceeds are reinvested in a new property. 1031 exchanges have always been a cornerstone of a healthy and vibrant commercial real estate market. An academic study  by Professors Ling and Petrova confirmed that investors who leveraged 1031 exchanges made appreciably greater capital investment into their properties than those without an exchange. 

Strategic reinvestments to redevelop underperforming properties have generated immediate economic benefits – including jobs, labor income, property taxes and Federal taxes – far in excess of the Federal taxes deferred.   

Without 1031 exchanges, many of my (Lippitt) clients would do nothing.  Currently, investors large and small can defer taxes, add capital, and buy property that wouldn’t be possible without 1031.  Some use it to upsize, others to downsize.  Either way,  the taxes are paid in full at upon sale. 

Needed Capital for in Underserved Communities

More recently, the Black American community has increased its share of the commercial real estate investment market through the prudent use of 1031 like-kind exchanges, making a critical reinvestment in their communities while building personal wealth. 

Investors are transforming underserved communities by turning outdated or distressed properties into beneficial uses such as renovating affordable multifamily housing or reinvigorating abandoned retail centers and strip shopping centers that have lost their anchor – activity which creates both temporary construction jobs and full-time permanent jobs in the community.    

Growing businesses use it to relocate and expand when they’ve outgrown existing space.  Section 1031 allows them to keep more capital in their business which enables them to expand and add employees with less debt.    

Colorado Stats

The Federation of Exchange Accommodators, the national organization of 1031 Exchange companies, analyzed the data from just 7 companies in Colorado during 2015 to 2019 and found: 

  • 14,147 properties were involved in exchanges; 
  • These properties had a total value of $21.7 billion; 
  • These transactions generated $3.5 million in state and county transfer taxes and recording fees in Colorado.   

That is just a small portion of 1031 activity as many companies facilitate 1031s in Colorado.  One in five commercial real estate transactions involve a 1031 exchange.  It provides fundamental liquidity to real estate.  It is clear Section 1031 is important to our region’s economy, and generates significant tax revenue – state income tax, increased property taxes and transfer taxes – much of which would be lost with a cap or change to Section 1031. 

Why Capping 1031 is a Loser

A 2019 macroeconomic study by Ernst & Young concluded that if section 1031 were limited or repealed, it would shrink GDP. The study further projected benefits from 1031 exchanges nationally for 2021 and concluded that these transactions will: 

  • support 568,000 jobs, representing $27.5 billion in labor income and generating $5 billion in Federal income taxes; 
  • generate $6 billion annually in Federal taxes from foregone depreciation on replacement properties; 
  • generate $2.8 billion in state and local taxes; 
  • add $55 billion to the GDP. 

Just the $5 billion in Federal taxes from jobs in one year far exceeds the 2021 Biden budget estimate of $1.95 billion per year over 10 years coming from a $500,000 cap on 1031 exchanges. Why would you cap 1031?  It doesn’t raise any money.

For many middle-class Black Americans, 1031 like-kind exchanges have presented new opportunities – the opportunity to plan for a comfortable retirement, create intergenerational wealth, and grow business interests organically without overreliance on debt. And an opportunity to reinvest in their community. As a Black American business owner, I (Nesbitt) utilized a 1031 exchange to trade out of a Chicago apartment building into an office building in the South Metro Denver market. Owning a building has allowed me save thousands of dollars in rent while building equity in commercial real estate and planning for my retirement. 

A cap on 1031 exchanges at any level would remove those opportunities and reinstall daunting barriers to the commercial real estate marketplace.   Section 1031 provides important capital to revitalize communities throughout Colorado Springs, Denver-Aurora area and the entire state to grow our economy. 

Eric L Nesbitt Esq Real Estate Attorney 002 Eric L. Nesbitt is a dual-licensed real estate attorney and commercial real estate broker. He is a shareholder in the Law Offices of Eric L. Nesbitt, P.C. (, and the founder and principal of the commercial real estate brokerage firm, The Nesbitt Commercial Group ( with Keller Williams DTC and KW Commercial. He is also the Past President of the Denver Metropolitan Commercial Association of Realtors (DMCAR). 

Marc Lippitt Marc S. Lippitt is President of Unique Properties, Inc., which he founded in 1974. Marc has consistently been recognized as one of Colorado’s top real estate brokers.  He is a Past President of the Denver Metropolitan Commercial Association of Realtors. 

Tips for using a 1031 exchange


It’s a seller’s market in Denver. A high demand for houses and a lower inventory of available homes has sent housing prices skyrocketing nationwide during the past year. But there may be some relief for buyers in the Denver area.  

While the local real estate market remains hot, it shows signs of cooling this summer. With many buyers giving up on purchasing a home for now, more houses are staying on the market longer than they have in the past year.  

This market change could spell good news if you’re interested in building your wealth through real estate investments. By using a 1031 exchange, you can make the most of your real estate profits during the still-hot market by investing in one of the hottest real estate markets in Colorado. 

Before jumping into real estate investment, find out how a 1031 exchange can benefit you. 

What is a 1031 exchange? 

IRS Section 1031 allows investors to defer capital gains taxes from the sale of one investment property by rolling over the profits into the purchase of a like-kind property within 180 days of the sale.  

There is some room for interpretation on what constitutes a like-kind exchange. For example, if you sold an individual-family home, you could roll over the profits by purchasing a townhouse, condo, or even a parcel of land for development. 

How does a 1031 exchange benefit investors? 

Savvy investors have been able to build wealth over time by deferring tax payments through 1031 exchanges. 

For example, if an investor bought a single-family home for $612,395 in May 2020, which was the average sale price in Denver County according to the Colorado Association of Realtors, in May 2021, they sold that home for the average price of $820,412. Through a 1031 exchange, the investor can defer the taxes on the $208,017 profit by investing that amount in a new property.   

The code also covers investment-related expenses, such as paying commission fees for real estate agents or making improvements on the property. 

At present, there is no limit to how many times or how often you can use a 1031 exchange. You can keep deferring indefinitely until you eventually sell the property for cash. At that point, you would only pay one tax instead of taxes on a lifetime of investments. 

How can you use a 1031 exchange? 

Real estate investments are one of the best and surest ways to grow your wealth over time. If you’re interested in using 1031 exchanges to meet your real estate investment goals, it is important to understand how the tax code can and can’t work for you.   

First, it’s important to know if now is the right time to make a 1031 exchange on your property. An ideal candidate is one that is near maximum appreciation. With the Denver market hot, but starting to cool, some properties are reaching this point.  

Not all properties are created equal. If your property has depreciated in value, or if your mortgage rate will give you a low return on investment, you may want to wait and hold onto that property. 

If you would like to test the waters on using a 1031 exchange to build your investments with lower stakes, you might consider a Delaware Statutory Trust. A DST allows an unlimited number of investors to jointly own real estate. A company, known as the sponsor, collects the investment money and handles the day-to-day of property sales and rents. DST investment periods typically run for five to 10 years. 

As an investor in a DST, you will regularly receive payments for your investment without having to manage the details. To learn more about DSTs that might be right for you, find a qualified broker-dealer who can manage a 1031 exchange DST on your behalf. 

What are special considerations for a 1031 exchange? 

A 1031 exchange does come with some exceptions and stipulations. You are required to pay taxes on any amount of profit that is not invested into the new property. For example, if you made a $200,000 profit on your sale but purchased a like-kind property for $150,000, you would need to pay taxes on the $50,000 difference. 

You must also follow set procedures if you decide to turn a home purchased through 1031 exchange into your primary residence or vacation home. The safe harbor rule states that in each of the two 12-month periods following the exchange, you must rent the property to another person at a fair market rate for 14 days or more, and your personal use of the property cannot exceed 14 days or 10% of the days the unit was rented during that 12-month period.  

As with any tax code, it is important to work with accountants or experts who fully understand how 1031 exchanges work to avoid having your investment become a pain point. There are companies that specialize in stewarding 1031 exchanges, including ones that operate in the Denver area. 

Kristen Herhold is the PR editor at Clever, a real estate data firm. In her free time, she enjoys reading, traveling, and cheering on the Denver Broncos and Missouri Tigers. Connect with Kristen on LinkedIn, or reach out to her at [email protected].