How to Dodge Capital Gains Taxes (for Now) With a Smart Real Estate Rollover

Selling real estate in Orange County often means big gains—but also big tax implications. One of the biggest hurdles sellers and investors face is capital gains tax, a levy on the profit earned from the sale of an appreciated asset.

“If you buy a property for $300,000 and later sell it for $400,000, that $100,000 gain is potentially subject to capital gains tax,” says Paul Miller, managing partner of Miller & Company Certified Public Accountants.

Luckily, depending on the type of property you’re selling, there are smart strategies—like the 1031 exchange—that can help you defer that tax and keep more of your money working for you.

Your Primary Residence: Built-In Tax Breaks

If you’re selling your primary residence, the IRS gives you a valuable exclusion.

“The exclusion is up to $250,000 for single filers and $500,000 for joint filers,” says Miller. That means you may not owe any tax at all on a big portion of your home’s appreciation.

To qualify, you must:

• Own the home for at least two years

• Live in it as your primary residence for two of the past five years

• Not have taken this exclusion in the past two years

In Orange County—where property values tend to appreciate steadily—this can be a major tax advantage.

What About Second Homes or Inherited Property?

If you’re selling a vacation home or inherited real estate, the tax rules shift.

For second homes, the primary residence exclusion doesn't apply unless you convert it into your main home for at least two of the last five years. As Mark Luscombe of Wolters Kluwer Tax & Accounting explains: “The primary home tax exclusion does not apply to a sale of a second home,” unless the home has been made your primary residence.

Inherited property is treated differently. The IRS gives it a "stepped-up" basis, which means the property's value resets to the market value at the time of the previous owner's death. That can drastically reduce—or even eliminate—any immediate capital gains tax when you sell shortly after inheriting it.

“However, any gain from appreciation after death is subject to capital gains tax unless also eligible for the exclusion on sale of a principal residence,” Luscombe notes.

Real Estate Investors: This Is Where the 1031 Exchange Comes In

If you're selling an investment property—whether it's a rental, commercial building, or development site—you could be facing a significant tax bill. But there’s a powerful tool you can use to defer those taxes: the 1031 exchange.

This provision of the tax code allows you to roll your profits from one property into another, deferring taxes until you eventually cash out.

“You’ll owe the tax eventually—usually when you sell the new property without doing another rollover—but it can be a great way to grow wealth over time,” says Miller.

That’s the beauty of a like-kind exchange: it keeps your capital working for you instead of sending a big chunk to the IRS. It’s especially useful in markets like Orange County, where appreciation potential is high, and upgrading from one property to another can lead to exponential value growth.

How to Qualify for a Capital Gains Rollover

To qualify for a 1031 exchange, the properties involved must be held for investment or business use—your personal residence or vacation home won’t qualify.

“So, a rental or commercial building would qualify, but your vacation home wouldn’t,” says Miller.

There are also strict timing rules:

• You must identify the new property within 45 days of the sale

• You must close on the new property within 180 days

You’ll also need to work with a qualified intermediary—someone who holds the funds and ensures compliance throughout the process. “You’re not allowed to touch the cash proceeds at any point in the process,” Miller emphasizes.

This is where using an “accommodation party” can help. This third-party facilitator ensures the transaction meets all IRS deadlines and eligibility requirements—so you can focus on the big picture: growing your portfolio.

Why It Matters in Orange County

In a market like Orange County, where real estate prices are high and still rising, a 1031 exchange can be a strategic move. “This helps investors scale up—moving from a duplex to a 10-unit building, for example—without being penalized for success,” says Miller.

Even if you're a smaller investor, this strategy can help you reposition your assets—perhaps selling an older rental and reinvesting into a modern, higher-rent property without triggering taxes today.

And in an economy where cash flow is key, avoiding a big tax bill means more funds to reinvest, renovate, or reposition your portfolio for growth.

Bottomline

Capital gains tax may be unavoidable in the long term—but with smart planning, you can defer it while scaling your real estate investments. Whether you're selling a rental, upgrading to a larger property, or just want to make the most of your gains, a 1031 exchange could be your best friend.

If you’re thinking about selling or investing in Orange County real estate, let’s talk. At Whitestone Real Estate, I help clients like you navigate the complexities of property sales and tax strategy—so you can keep more of your wealth and make confident moves toward your goals.

Reference: Taylor, J. (2025, April 14). A Capital Gains Rollover Can Help You Avoid a Big Tax Bill—but Not Forever. Realtor.com.