If you’ve recently sold an investment property or are planning to, you’re likely staring down a significant tax bill. For decades, savvy investors have turned to 1031 exchanges to defer those taxes.
1031s are powerful, but they come with strings attached:
- Tight timelines.
- Complex paperwork.
- Strict like-kind rules.
- A requirement to reinvest all proceeds. [1]
Accredited investors and their advisors are adopting a less restrictive approach to reinvesting. They are leveraging depreciation losses from passive real estate investments to offset gains. At BAM Capital, we informally refer to this approach as a passive 1031.
WHAT IS A PASSIVE 1031 & WHY ARE INVESTORS USING IT?
A traditional 1031 exchange is derived from Internal Revenue Service (IRS) Code Section 1031, which outlines the process of swapping one investment property for another without incurring capital gains taxes immediately. [2]
Investors should remember that this is not a tax-free strategy but a tax-deferred one. Taxes on previously deferred gains will eventually be due when the investor sells without reinvesting in another qualifying property. 1031 exchanges can help investors defer taxes, grow their portfolios, and diversify their investments while also offering estate planning advantages. [2]
Rather than reinvesting through a formal 1031 exchange, investors are turning to high-quality multifamily syndications (private placements) or real estate funds that generate paper losses through accelerated depreciation. These losses can then be used to offset taxable gains, often significantly, without the standard red tape and restrictions associated with a 1031 exchange, making it a passive 1031. [3]
USING PASSIVE LOSSES TO OFFSET PASSIVE GAINS
When you invest in a real estate syndication or private placement fund, especially one designed with a tax strategy in mind, you often incur substantial paper losses in the early years. These come from accelerated depreciation strategies, such as cost segregation and bonus depreciation. [4][5]
Even though the property might be cash-flowing, tax filings often show a loss because depreciation is a non-cash expense. If you qualify as a passive investor, those losses are considered passive losses. Under current IRS rules, they can be used to offset passive income, including passive capital gains from the sale of other real estate properties. It’s essential to check with your CPA before taking any action.
This is the core of a passive 1031 strategy:
🗸 You sell your property.
🗸 You invest some of the proceeds into a tax-efficient multifamily fund.
🗸 You receive depreciation losses from the new investment.
🗸 Those losses help offset some or all of the gains from your recent sale.
All without:
✗ Finding a like-kind property.
✗ Working with an intermediary.
✗ Racing against a 45-day identification or 180-day close window.
✗ Reinvesting all of your sale proceeds. [6]
HOW MUCH CAN YOU OFFSET?
It depends on your numbers, gain amount, investment size, and how your financial advisor or CPA classifies your income. But it’s not uncommon for depreciation in a well-structured multifamily investment to shield a large portion of gains in year one.
Keep in mind that this isn’t a full deferral like a 1031. You may still owe some tax depending on your total passive income and other variables. You should always consult your CPA before making any decisions.
That said, it’s often far more flexible than a traditional 1031 exchange, with the added benefit of diversified, passive income from a professionally managed asset.
WHY BAM CAPITAL?
For a flexible, tax-efficient alternative to the traditional 1031 exchange, without the deadlines, like-kind rules, or reinvestment stress, consider BAM Capital. Our funds are built with tax-aware investors in mind. For example, BAM Multifamily Growth Fund V is structured to take advantage of cost segregation and bonus depreciation, meaning our accredited investors receive tax losses that can be used to defer long-term gains, depending on their individual tax situations. [7]
With a proven track record in Class A multifamily acquisitions across growth markets in the U.S., BAM Capital offers institutional-quality assets, significant tax advantages from depreciation, and a hands-off investing approach for limited partners.
For investors transitioning out of active management, those who have recently experienced a gain from a property sale, or those seeking a more innovative approach to tax management, this is a potentially compelling next step.
RISKS & IMPORTANT CAVEATS
This strategy won’t work for everyone. It depends on your tax situation, how your income is classified (active vs. passive), and the amount of depreciation your new investment generates. Talk to your financial advisor or CPA to determine how depreciation from a new real estate investment will impact your specific tax situation. [5]
Not all syndications or private placement funds are created equal. If you’re considering this strategy, make sure the fund you’re investing in is structured to deliver the necessary depreciation. Depreciation recapture may apply down the road. Again, this is something to discuss with your advisor. [5]
CONSIDER YOUR OPTIONS WITH BAM CAPITAL
If you’re staring down a significant gain from a recent real estate sale, don’t assume a traditional 1031 is your only path. A growing number of investors are opting for a more flexible, tax-efficient strategy that avoids deadlines and generates passive income, all while working to shield gains through depreciation.
At BAM Capital, we’re here to help accredited investors navigate these options and position their capital for long-term growth.
A traditional 1031 exchange’s strict requirements make it incompatible with a fund investment into one of our partnerships. However, the losses you receive as a member of one of our growth funds can potentially offset the gains you may have from selling your asset. So, while you cannot technically do a 1031 with BAM Capital, you may be able to achieve a similar effect and reduce your tax liability/obligation. [8]
Let’s start a conversation. Consult your financial advisor or CPA for guidance on your portfolio’s suitability for our products.
SOURCES
[1]: Investopedia. (2024). “What Is a 1031 Exchange? Know the Rules.” https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
[2]: BAM Capital. (2025). “Are 1031 exchanges a tax-deferred real estate strategy?” https://bamcapital.com/tax-deferred-real-estate-strategy-1031-exchange-2025/
[3]: BAM Capital. (2025). “Proven passive income strategies that will make you think twice abut multifamily syndication.” https://bamcapital.com/proven-passive-income-strategies-multifamily-syndication-guide-2025/
[4]: Best Ever Commercial Real Estate. (2024). “What’s a ‘Lazy 1031 Exchange’ and How Does It Defer Taxes?” https://www.bestevercre.com/blog/lazy-1031-exchange-defer-taxes
[5]: Forbes. (2024). “Why A Cost Segregation Study Could Save Your Tax Season.” https://www.forbes.com/councils/forbesbusinesscouncil/2024/04/02/why-a-cost-segregation-study-could-save-your-tax-season/
[6]: BiggerPockets. (2024). “Here’s the ‘Lazy 1031 Exchange’ and How To Do It.” https://www.biggerpockets.com/blog/lazy-1031-exchange
[7]: BAM Capital. (2025). “BAM Multifamily Growth Fund V.” https://bamcapital.com/fund-v/
[8]: BAM Capital. (2025). “BAM Capital Frequently Asked Questions: Product Information.” https://bamcapital.com/bam-capital-faq-product-information/
