OBBB Act Interest in ALTS ~ Part Two  

In the ini­tial post “OBBB Act Prompts Big Beau­ti­ful Inter­est in Alter­na­tives” OBBB Act Part One we sum­ma­rized some of the ques­tions and inter­est in Alter­na­tive Invest­ments (ALTS) based on the pass­ing of the Act. Investors are seek­ing strate­gies in many areas involv­ing tra­di­tion­al real estate and ALTS strate­gies.

July 22, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ists & DST Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

In this post we will explore how investors com­bine Sec­tion 121 and poten­tial tax strate­gies.  We are pro­vid­ing these strate­gies not as a CPA or tax con­sul­tant. We have worked with investors over years of alter­na­tive invest­ing. While many of our con­ver­sa­tions focus on invest­ment real estate (not pri­ma­ry res­i­den­tial real estate). Most involve §1031 exchanges uti­liz­ing Delaware Statu­to­ry Trust (DSTs) or rein­vest­ing of cap­i­tal gains (from all sources includ­ing real estate) into oppor­tu­ni­ty zones.  Sec­tion 121, Sec­tion 1031, and Oppor­tu­ni­ty Zones are all intact with the OBBB act. Recent­ly there have been many inquiries from indi­vid­u­als who have high­ly appre­ci­at­ed pri­ma­ry res­i­dences and are seek­ing sug­ges­tions and plan­ning ideas on how to han­dle the poten­tial tax impli­ca­tions of sell­ing a pri­ma­ry res­i­dence that has appre­ci­at­ed over their hold­ing peri­od.  

Sec­tion 121 Back­ground.

Sec­tion 121 Exclu­sion has been in exis­tence since August 5, 1997, and was part of the Tax­pay­er Relief Act of 1997. Before this date, home­own­ers relied on Sec­tion 1034 which allowed defer­ral of gain if pro­ceeds from a home sale were rein­vest­ed into anoth­er home of equal or greater val­ue. There were pros and cons to this strat­e­gy. How­ev­er, let’s focus on the cur­rent rules. The exclu­sion does have a max­i­mum lim­it.  For sin­gle fil­ers the exclu­sion is $250,000. For mar­ried cou­ples fil­ing joint­ly the exclu­sion is $500,000.  This is both spous­es meet the use test and at least one spouse meets the own­er­ship test. The “use test” required par­tic­i­pants to have lived in the home as their prin­ci­pal res­i­dence for at least 2 years out of the last 5 years to take advan­tage of this exclu­sion. In addi­tion, you must have owned the home for at least 2 years out of the last 5 years before the sale. As a note, the two years do not need to be con­tin­u­ous.

Why all the ques­tions regard­ing §121 strate­gies and Alts

There are areas of the coun­try (espe­cial­ly on the west coast) where prop­er­ty own­ers who have lived in the home for num­bers of years may be expe­ri­enc­ing a tremen­dous increase in val­ue.  We receive calls from prop­er­ty own­ers who have pur­chased the prop­er­ty for under $400,000, lived in the homes for 20 years and now the prop­er­ty is val­ued at over $2M.  With the $500,000 exclu­sion that leaves $1.1M sub­ject­ed to long-term cap­i­tal gains.  Depend­ing on the state of res­i­dence poten­tial­ly there may be 30% in tax­es due.

Here are the num­bers in a chart:

Yes, the prop­er­ty own­ers retain 70% of the gain but may seek poten­tial strate­gies even if they elect to sim­ply pay the cap­i­tal gains tax­es.  Tech­ni­cal­ly, with the cur­rent Sec­tion 121 the exclu­sion is repeat­able poten­tial­ly once every two years not just once in a life­time. Mean­ing you may move every few years and enjoy a repet­i­tive $500,000 exclu­sion.

A point in time

There comes a time in cer­tain prop­er­ty own­ers’ lives where the cur­rent home may become too large, and the prop­er­ty own­ers wished to down­size. There are many oth­er rea­sons for pulling equi­ty out of the home for finan­cial rea­sons (although with cur­rent inter­est rates that may be a chal­lenge). There are a few alter­na­tives to sim­ply sell­ing the home, tak­ing the $500,000 exclu­sion (and your cost basis) and pay­ing the cap­i­tal gains. There may also be a point in time where aging adults need to make oth­er arrange­ments with fam­i­ly or anoth­er liv­ing alter­na­tives. The finan­cial aspects of the deci­sion may at times become sec­ondary to the per­son­al and well-being deci­sion.  The lev­el of care as seniors age may become the focal point of all deci­sions.

What are the Options

Option 1- Move out and turn the pri­ma­ry res­i­dence into a rental and attempt to enter into a 1031 exchange

Option 2- Sell home now and invest cap­i­tal gains into the cur­rent Oppor­tu­ni­ty Zone. AKA OZ 1.0

Option 3- Plan on sell­ing home in 2–3 years (after Jan 2027) and move into a future Oppor­tu­ni­ty Zone. AKA 2.0

Option 1- Move out of the house and con­vert the home into a rental.

If you have the abil­i­ty to pur­chase anoth­er home and rent out the pri­ma­ry res­i­dence this may be an option.  This would poten­tial­ly com­bine §121 and §1031. You would need to rent the prop­er­ty for a safe har­bor peri­od (typ­i­cal­ly 1 year but some con­ser­v­a­tive CPAs will say two years). There would need to be an arm’s length lease on the prop­er­ty at mar­ket rents estab­lished.  The exist­ing prop­er­ty own­er would retain own­er­ship and claim the rental income and oth­er tax effi­cien­cies along with the main­te­nance, tax­es and insur­ance on the prop­er­ty in most cas­es. After or near the end of the safe har­bor peri­od the prop­er­ty can be list­ed for sale and sold. This process may be any­where between a 2–4‑year process.

Then when you sell the home you are enti­tled to claim the exclu­sion (if you meet the cri­te­ria stat­ed above) and then poten­tial­ly do a §1031 exchange on the bal­ance of the pro­ceeds.  All the §1031 guide­lines need to be fol­lowed and uti­liz­ing the ser­vices of a qual­i­fied inter­me­di­ary.  In addi­tion, you should state in the pur­chase con­tract of your pri­ma­ry res­i­dence (now your rental prop­er­ty in part) that you intend to uti­lize a §1031 exchange. Many investors (espe­cial­ly at a cer­tain age) will seek pas­sive income using an DST as an ALTS strat­e­gy).

You need to have the abil­i­ty to move into anoth­er prop­er­ty (either rent­ing or pur­chas­ing) until the end of the rental peri­od of the vacat­ed pri­ma­ry res­i­dence and then begin the sales process on the pri­ma­ry res­i­dence.  The §1031 exchange enables you to defer the cap­i­tal gains until a future peri­od of time. Your accoun­tant would need to estab­lish the basis in the “rental” home you sold for future cap­i­tal gains cal­cu­la­tions.  Also, there will be a step up in the basis when the prop­er­ty own­er, now investor, pass­es away.  The heirs of the estate would enjoy a step up in basis to the cur­rent mar­ket val­ue.

Option 2 Sell Now & Use an Oppor­tu­ni­ty Zone

Take action imme­di­ate­ly and exe­cute the sale of the pri­ma­ry res­i­dence, retain the basis, take the $500,000 exclu­sion and pur­chase anoth­er (smaller/downsized) home, relo­cate, rent or arrange oth­er liv­ing facil­i­ty (senior liv­ing). The bal­ance of the pro­ceeds sub­ject to cap­i­tal gains would be invest­ed in an oppor­tu­ni­ty zone under the cur­rent OZ struc­ture. This would com­bine Sec­tion 121 and OZ.  The cur­rent struc­ture defers cap­i­tal gains until the end of 2026 (due in April 2027).  There are sev­er­al advan­tages to invest­ing soon­er rather than lat­er.  Cer­tain spon­sors of OZ have strate­gies to assist with funds to off­set cap­i­tal gains. In addi­tion, some OZ pay a quar­ter­ly or month­ly dis­tri­b­u­tion.  The cur­rent OZ leg­is­la­tion has been ref­er­enced as “OZ 1.0” to be replaced by “OZ 2.0”.  OZ 1.0 will have the cur­rent des­ig­nat­ed zones (cen­sus tracts) reduced by 20%+ of the cur­rent des­ig­nat­ed zones. This is based on many of the cur­rent zones (estab­lished from the 2010 cen­sus) which have been well estab­lished and may not need as many incen­tives for investors. Exe­cut­ing this strat­e­gy now enables cur­rent pri­ma­ry res­i­dent with an exit plan to sell the cur­rent pri­ma­ry res­i­dence, estab­lish anoth­er pri­ma­ry res­i­dence, and enjoy the OZ ben­e­fits after ten years ne enjoy­ing no fed­er­al cap­i­tal gains on the growth of the invest­ment. Most states also rec­og­nize the exclu­sion of any cap­i­tal gains tax­es. (There are cer­tain states that are not par­tic­i­pat­ing in the OZ long term cap­i­tal gains exclu­sion). The cap­i­tal gains would need to be paid April 2027. We do have a full 10+ year exam­ple of a hypo­thet­i­cal cash flow analy­sis uti­liz­ing this pow­er­ful strat­e­gy.

Option 3. Plan for a future exit after Jan 2027

OZ 2.0 will become effec­tive after Jan­u­ary 1, 2027. This plan has a few advan­tages for prop­er­ty own­ers who can stay in their homes and put off a mover for 2–3 years. (Although one investor said he can­not wait to make his next move, and he does not need to kick the can down the road). Under OZ 2.0 there will be addi­tion­al rur­al OZ des­ig­nat­ed (by state gov­er­nors start­ing July 1, 2026) and rur­al invest­ments will car­ry a few addi­tion­al incen­tives. Also, there will be a 5‑year defer­ral of cap­i­tal gains tax­es with a 10% step up on a basis. In the exam­ple above the basis would increase to $440,000 and reduce cap­i­tal gains tax­es.

There are many investors seek­ing to put a plan in motions now rather than wait­ing 2–3 years in the future. Please reach out to use for gen­er­al ques­tion regard­ing poten­tial alter­na­tive invest­ment strate­gies in the sales of a pri­ma­ry res­i­dence and Sec­tion 121.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.