Real estate investment can significantly impact the tax strategies of high-net-worth individuals. This article presents expert-backed tips to optimize tax outcomes in real estate transactions. From leveraging exemptions to strategic property management, these insights offer valuable guidance for wealthy investors navigating the complex intersection of real estate and taxation.
- Leverage Principal Residence Exemption
- Hold Property for Two Years
- House Hack to Maximize Deductions
- Elect ECI for Foreign Investors
- Use 1031 Exchange for Tax Deferral
- Accelerate Depreciation with Cost Segregation
- Hire Tax Adjuster and Transfer Entity
Leverage Principal Residence Exemption
For me, one of the smartest ways to minimize taxes on real estate investments is by taking full advantage of the principal residence exemption. If you qualify, this can eliminate capital gains tax entirely when selling your primary home. It’s something that many overlook, especially when managing multiple properties, but with the right planning, designating the right property as your principal residence over the years can significantly reduce your tax exposure.
For high-net-worth individuals, the stakes are even higher, and there are a few critical things to consider when buying, selling, or holding real estate. First, ownership structure plays a major role. In my opinion, deciding whether to hold real estate personally, through a corporation, or in a trust has major tax, liability, and estate planning implications. I’ve worked with clients who’ve saved substantial amounts simply by holding their properties in the right vehicle from the start.
Another key factor is the timing of a sale. By spreading property dispositions across different tax years or using tax deferral strategies where applicable, you can manage your overall tax liability more effectively. If you’re investing in rental properties, don’t overlook capital cost allowance (CCA), which allows you to claim depreciation to reduce your taxable rental income. While Canada doesn’t offer the same cost segregation benefits as the U.S., you can still allocate costs across different asset categories to maximize write-offs.
If you’re also investing across the border, U.S. real estate has its own set of rules, including the 1031 exchange. This allows you to defer capital gains by rolling the proceeds from one investment property into another, which is something I’ve seen work very well for Canadian investors with U.S. portfolios.
Lastly, estate planning should never be an afterthought. Real estate is a great way to build generational wealth, but it comes with challenges if not structured properly. For high-net-worth individuals, planning ahead for how properties will be transferred, either during your lifetime or after, can help avoid costly probate fees, double taxation, or even forced sales to cover tax bills. For me, working alongside a strong tax advisor is essential. I always recommend a collaborative approach to align your real estate goals with the bigger financial picture.
Adam Chahl
Owner / Realtor, Vancouver Home Search
Hold Property for Two Years
One smart tip for minimizing taxes on real estate gains is to hold the property for at least two years—especially if it’s your primary residence.
Why? There are two key reasons:
1. Lower Capital Gains Tax Rate:
If you sell an investment property too soon—within a year—your profits are taxed as ordinary income, which could be as high as 37%. However, if you hold it for over a year, you’ll likely qualify for the long-term capital gains tax rate, which is significantly lower.
2. Tax-Free Gain on a Primary Home:
If you’ve lived in and owned the property for at least two of the last five years, you could exclude up to $250,000 of profit ($500,000 for married couples) from taxes altogether. This can be a game-changer for high-value home sales.
3. 1031 Exchange for Investment Properties:
If you’re selling an investment or income-producing property, a 1031 exchange allows you to roll those proceeds into another like-kind property—deferring your capital gains taxes entirely. It’s a smart move for high-net-worth investors focused on portfolio growth and long-term strategy. Timing and structure are key, so always work with a qualified intermediary.
Yelena Horton
Global Real Estate Advisor, Sotheby’s International Realty
House Hack to Maximize Deductions
As a real estate investor with a 7-figure portfolio, my favorite tip for minimizing taxes on real estate investments is house hacking. With this strategy (which involves living in the house you’re renting out to tenants), you can deduct common expenses like mortgage interest, property taxes, repairs, and utilities. This can save you a lot of money long-term, which you can then reinvest into more properties to build wealth faster.
Ryan Chaw
Founder and Real Estate Investor, Newbie Real Estate Investing
Elect ECI for Foreign Investors
I help foreign investors purchase investment properties in the US.
For overseas buyers entering the US housing market, the tax implications can be complex. The default setting for foreigners with US source income is the FDAP rate (fixed, determinable, annual, periodic). This is a withholding tax of 30% of your gross income. It is extremely high and instantly makes most property investment purchases unfeasible.
Instead, foreigners can elect to have their US rental property income taxed as ECI (effectively connected income). This is where we state the income is ‘effectively connected’ to a US trade or business. As we rent the property out, it is considered a business, not a personal asset.
Making the ECI election when you file your 1040-NR US tax return does two things:
1. It allows you to make deductions from your gross rental income for all of your operating costs such as mortgage interest, property taxes, repair costs, insurance premiums, and property management fees. You can also deduct depreciation for your rental property, which is substantial.
2. You will pay tax at the same graduated rates as U.S. citizens.
In most cases, making the ECI election will reduce your US income tax liability to zero (or close to it), although foreigners should be aware of depreciation recapture when they sell the property.
Another small tax strategy we use is to pay full price for the property and negotiate a seller concession to cover closing costs. By paying full price, we increase the cost basis of the property for accounting purposes. This allows us to make a larger depreciation deduction from our US source income and may also reduce the capital gains tax burden upon sale of the property.
David Garner
General Manager, Cashflow Rentals
Use 1031 Exchange for Tax Deferral
One tip for minimizing taxes on real estate investments is to use a 1031 exchange when selling investment property. It allows you to defer capital gains taxes by reinvesting the proceeds into another like-kind property—so your money keeps working instead of going to the IRS.
For high-net-worth individuals, the key is a long-term strategy. That includes holding assets in the right legal structure (like an LLC or trust), using cost segregation to accelerate depreciation, and timing sales or refinancing around your income peaks and valleys.
The goal isn’t just tax deferral—it’s maximizing cash flow and control while minimizing exposure. Smart planning now creates flexibility and wealth preservation down the road.
Yancy Forsythe
Owner, Missouri Valley Homes
Accelerate Depreciation with Cost Segregation
One of the most effective ways we’ve minimized taxes in real estate is by using cost segregation studies to accelerate depreciation. If you own a building, especially a commercial or multifamily property, breaking out the components, like fixtures, appliances, and certain structural elements, lets you front-load the depreciation and offset a lot more income early on. It’s a no-brainer if you’re planning to hold the asset for a while.
Ricardo Sims
CEO, Constitution Lending
Hire Tax Adjuster and Transfer Entity
The first option is to act just like when you’re fighting insurance claims. You always hire a claims adjuster, and in this case, you always hire a tax adjuster. Usually, we can get about 10% off, even in areas with skyrocketing taxes such as Harris County, Houston. There, we’ve had one of our apartments increase taxes from $150,000 a year to over $450,000 a year. Now, 10% is not much, but it definitely helps.
One thing that depends on what state you’re in. I know New York has a little trick where you transfer the entity over to the next person, just like Texas. And then New York has a rule where if you assign over 1%, there are all these little tricks that apply to each situation that all the lawyers know in each state.
Lane Kawaoka
CEO, theWealthElevator(dot)com