For executives and business owners, prosperity is often measured by growth, milestones, and successful exits. Yet with every sale comes a hidden cost that can reshape your financial future: capital gains taxes. A substantial portion of your success can be quietly siphoned away, reshaping your long-term financial trajectory.
The Price of Prosperity: How Gains Shrink
Capital gains taxes don’t just reduce your net proceeds; they diminish your ability to redeploy capital. A $5 million sale, for example, could trigger a combined tax burden of over $1 million when you account for federal and state taxes, as well as depreciation recapture. This money can no longer compound, representing a significant missed opportunity that can stall your momentum and limit future growth.
The potential pitfalls include:
Timing Risk
Selling in the wrong year can push you into a higher tax bracket, amplifying your tax burden.
Layered Exposure
Federal, state, and local taxes can stack up quickly, resulting in an effective tax rate far steeper than anticipated. The top federal long-term capital gains tax rate for high-income earners is 20%. When you add the 3.8% Net Investment Income Tax (NIIT) and high state rates, such as California’s top marginal income tax rate of 13.3%, the combined rate can exceed 37% [1, 2].
Depreciation Recapture
For real estate, a portion of the gain related to prior depreciation deductions is “recaptured” and taxed at a maximum rate of 25%, further increasing the tax bill [3].
Business Impact
Funds intended for reinvestment, succession planning, or a new venture can shrink before they are ever put to use.
Strategic Tools for High Earners
The good news: advanced planning can help mitigate this drag and protect what you’ve built. Executives and high-net-worth professionals often look to these tools:
1031 Exchanges and Delaware Statutory Trusts (DSTs*)
Defer capital gains from investment real estate by reinvesting into like-kind property. With a Delaware Statutory Trust (DST*), you can access institutional-grade assets and possibly enjoy passive ownership without the burdens of direct management.
Installment Sales Trusts
Spread the recognition of a large gain across several years, smoothing income and helping you avoid a single, costly tax spike.
Charitable Trusts
Tools such as Charitable Remainder Trusts (CRTs) and Donor-Advised Funds allow you to align philanthropic goals with tax deferral. You can receive immediate tax deductions, create an income stream, and ultimately direct the funds to causes you care about.
Cost Segregation Studies
If you hold investment real estate, a cost segregation study can accelerate depreciation, providing a tax shield to offset gains from other income sources and boost near-term cash flow.
Alternative Investments*
Precious metals, energy related investments, productive land or exotic wildlife programs can potentially reduce reliance on public markets while offering unique tax advantages that improve after-tax outcomes.
Risks and Considerations
All planning tools involve trade-offs and risks that must be weighed carefully:
- DSTs and many alternative investments are considered illiquid. Investors should be prepared to hold for the full term, as early exit options are limited.
- In certain vehicles, management decisions rest with sponsors or trustees, not individual investors.
- Strategies like installment sales trusts or charitable trusts require specialized legal and tax expertise.
- Underlying assets, real estate, energy, or private equity, may lose value due to economic conditions.
- No strategy guarantees profits. Investors may lose part or all of their investment.
- Future legislation may alter the benefits of current strategies.
Coordinated Planning
The difference between paying the price of prosperity and preserving it often lies in timing and coordination. General compliance work alone isn’t enough. This level of advanced tax mitigation requires an experienced team of advisors, CPAs, attorneys, and financial strategists, who understand both the rules and your unique goals. A coordinated team approach ensures strategies are aligned with your broader goals.
With foresight and a proactive strategy, you can redirect what would have been lost to taxes into productive, income-generating assets that continue to build and compound your wealth.
Prosperity to Preservation
Every dollar lost unnecessarily to taxes is a dollar that cannot support your next venture, fund your legacy, or provide security for the next generation. With foresight, you can redirect what would have been surrendered into assets that continue to generate income and growth.
Want a clear roadmap for protecting your next sale or liquidity event? Download our free eBook:The 1031 DST Advantage: A Tax Strategy Made Simple.
🤝 If you or someone you know is preparing for a sale and needs clarity on tax-efficient strategies, 1031 DST Group is here to help. Get a free consultation or learn more at https://www.1031dstgroup.com/free-consultation
Disclosure: The strategies described are complex and may not be appropriate for all investors. This material is for informational purposes only and should not be construed as individualized tax, legal or investment advice. Investors should consult with their own tax advisors, legal counsel, and financial professionals. *DST investments and alternative investments, involve risk, including loss of principal, are illiquid, and generally suitable only for accredited investors**. **Accredited investors are defined under SEC Rule 506 of Regulation D. Generally, an investor is deemed accredited if their net worth is greater than $1,000,000 exclusive of their primary residence and/or their annual income exceeds $200,000 for the current and past two years. ***Illustrative examples only. Actual results may vary. Offers, when available, are made solely through the official Private Placement Memorandum (PPM). Investment advisory services are offered through Realta Investment Advisors, Inc., a US SEC Registered Investment Advisor. Securities are offered through Realta Equities, Inc., Member FINRA/SIPC, 1201 N. Orange St., Suite 729, Wilmington, DE 19801. Realta Wealth is a trade name used by Realta Equities, Inc. and its affiliate Realta Investment Advisors, Inc.
