As an investor, you basically have 6 options. Some are definitely more appealing than others.

1 Sell and pay excessive amounts of real estate or investment capital gains tax.
2 Do a 1031 exchange and buy another like-kind property of equal or greater value.
3 Set up a Charitable Remainder Trust
4 Set up an Installment Sale through a Foundation
5 Set up a Structured Sale or do your own Installment Sale
6 Do a 1031 exchange into a Tenant in Common property.

The first one is without a doubt the least desirable. Let's explore the others one at a time.

The Direct Sale Option

The simplest option a client has. You simply sell the asset and pay the taxes.

The 1031/Tenant in Common Exchange

Another option is a 1031 exchange into a tenant in common property. As a real estate investor, you remain in control of your asset, the capital gains taxes can literally be deferred forever (as long as you never sell outright), you can get a substantial passive income, and you no longer have the headaches of property management. The investment property is sold, and before the close of escrow, you file paperwork with a qualified intermediary that a 1031 exchange will be performed. The QI handles the exchange of monies, and you choose a tenant in common property to purchase. It is a clean and total like-kind exchange. You receive a deeded interest in a quality commercial investment property (should you choose wisely). It is proportionate to your overall contribution in the 1031 exchange. All capital gains taxes are deferred, you usually will not have closing costs to worry about, and you will have non-recourse debt on the new property. This means you will not be responsible for making additional mortage payments on this debt (it is factored into the cost of management) and if something does happen with the building, your other assets are protected. You will also most likely receive tax advantages of depreciation and interest deductions.
You are able to maintain control of your asset for future exchanges and appreciation potential.
Upon your death, the tenant in common property passes to your heirs at the stepped up fair market basis (under current tax laws) and no capital gains taxes or recaptured depreciation is owed!
Compare the options above and decide for yourself which option, or combination of strategies give you the most monetary gain, flexibility, income, tax savings, control and potential for appreciation. Education is the number one priority. It increases your ability to make an informed choice.
Please note, for several of the above choices you may need the assistance of other professionals such as realtors, attorneys, CPAs and other financial professionals. We believe in working with your advisors so everyone is on the same page and also informing you when someone else can better assist you in a certain area than us.

The Traditional Option

If you, as a real estate investor, do a traditional 1031 exchange, you must buy a property of at least the same value as the property which you sell. Yes, you do defer the capital gains tax owed, but this often means obtaining a new mortgage unless you own the property outright. Maybe the new mortgage will have a higher interest rate and higher payments. Also you may also incur higher property taxes and insurance costs. And, you are still a landlord with the same headaches you are trying to avoid. You must decide if this suits your current needs.

The Installment Sale Through A Foundation

A very innovative Capital Gains Saving option that has existed since 1969 is a hybrid vehicle which incorporates some of the best parts of a Charitable Trust and a Structured Sale, while eliminating some of the less desireable features of each. It is a combination of a Charitable Bargain Sale and an Installment Sale. In very basic terms, it is an exchange of your asset for a series of guaranteed fixed payments at a fixed interest rate over a fixed period of time. Because the public foundation, which is a non-profit organization, transacts the sale for you and receives the proceeds, you are also afforded some very nice tax breaks. These include a substantial charitable deduction which can be used to lower your income tax, a partial forgiveness of capital gains tax and recaptured depreciation (if applicable), and it spreads out the repayment of the remainder of the capital gains tax over many years. Although the recaptured depreciation is paid at time of sale, the amount due is significantly reduced by the offsetting tax deduction and the amount forever forgiven. The asset is partially removed from your estate, so your heirs will not occur the entire estate tax consequences (further planning can be done to remove it entirely if this is a concern), and the monies have an additional layer of protection from creditor access. The total effect is that you actually keep a greater amount of your proceeds, are repaid your principle less the inital bargain sale portion with interest, have the peace of mind which comes from a guaranteed payment stream, and also provide funds to a good cause. Any monies left not paid out at the time of your death pass to the beneficiaries of your choice, and they even have the option of continuing the payment stream. The tax laws which govern this strategy are IRS codes 453, 1011(b) and 501(c)3. This strategy is available for sales of all capital assets with the exception of qualified money. These are commonly real estate, businesses, stock portfolios, rare collections, etc. It offers the seller arguably the greatest combination of legitimate tax advantages of any such exit strategy to date.

The Charitable Remainder Trust

A charitable remainder trust has its place as a valid capital gains tax saving strategy. Although designating your principle to your favorite charity upon your death is a worthy goal, you may not wish to be quite so philanthropic if you have another choice. A trust must be established, the property placed in the trust before sale, and then basically, the proceeds are earmarked for charity upon death. You do get the benefit of any interest which accrues on the principle during your lifetime, and perhaps the lifetime of your spouse. You will pay ordinary income tax when you receive this money. You also get a tax deduction for the amount pledged to the charity. If healthy enough, a life insurance policy may be purchased to pay your beneficiaries an amount equal to what they won't inherit. This can be costly, depending on your age and the face amount of the policy. This is fine if you don't need the income to live on, want the property removed from your estate, and want to leave the largest legacy possible to your favorite charity. Once again, the capital gains taxes are not paid because charities don't pay taxes, but you no longer have control of your asset and the associated principle. This option is often used by fairly wealthy people with multiple assets and sources of income, who also have a favorite cause.

The Structured Sale

The Structured Sale is a form of Installment Sale. It became an option in 2005 and is currently offered through a couple of major insurance carriers and their associated Assignment Companies. The basic concept is that instead of receiving a lump sum for the total purchase price from the buyer, the buyer passes the lump sum to an Assignment Company and assigns the obligation to make payments back to you, the seller, over a period of time at a fixed interest rate. The Assignment Company which is partially owned by an Insurance Company, backs its obligation by investing the proceeds in a single premium fixed annuity product offered by the associated carrier. You are able to determine how long you would like those payments spread out (number of years), and thus your capital gains tax obligation is spread out as well. The payments are broken down into return of cost basis (non-taxable), capital gain (amount you owe capital gains tax on) and interest (taxed as ordinary income). If you sell a real estate investment property which you have depreciated over time, you will owe the associated recaptured depreciation as of time of sale (next tax return). The Structured Sale, as well as an installment sale between two parties are both legitimate options and should be used as part of the basis of comparison to determine which strategy best suits your individual needs.