The ultra-wealthy employ sophisticated, legal strategies to minimize their federal income tax liability, leveraging provisions in the U.S. tax code that favor capital investment, deferral, exclusions, and accelerated deductions. These methods—rooted in laws like the Tax Cuts and Jobs Act (as amended) and the recent One Big Beautiful Bill Act (OBBBA, signed July 2025)—are not evasion but optimization, often requiring significant capital, professional advisors, and compliance with rules like passive activity limitations and economic substance doctrines. With the OBBBA permanently restoring 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025 (per IRS Notice 2026-11 and related guidance), certain real estate plays have become exceptionally powerful in 2026 and beyond. Here are the top 10 ways the ultra-wealthy reduce federal income taxes, starting with the standout real estate strategy you requested.

1. Investing in Mobile Home Parks for Bonus Depreciation (via Cost Segregation)

Mobile home parks (MHPs, also called manufactured housing communities) top the list due to their unique asset composition and the OBBBA’s permanent 100% bonus depreciation reinstatement. Unlike traditional multifamily apartments (mostly 27.5-year residential real property), MHPs feature minimal structures classified as long-life real estate. A professional cost segregation study typically reallocates 60–90%+ of the depreciable basis (purchase price minus land) into shorter categories: 5-year personal property (park-owned movable homes with axles/VINs, appliances, HVAC), 7-year assets, and especially 15-year land improvements (roads, utilities, pads, site work, drainage).

With 100% bonus depreciation now permanent for qualified property (MACRS recovery ≤20 years) placed in service after January 19, 2025, investors can deduct the vast majority of reallocated basis in year one. Example: Acquire a $3 million MHP, $600k land value → $2.4M depreciable basis. A cost seg study might accelerate $1.5M–$2.2M (60–90%+) into 5/15-year classes, allowing a near-full first-year write-off. At a 37% marginal federal rate (plus potential NIIT/state taxes), this generates $555k–$814k+ in immediate tax savings, often creating passive losses to offset other income (or carry forward). Studies typically cost $5k–$15k, yielding ROI frequently 50–200x in year-one savings alone. Ongoing cash flow from lot rents remains largely untaxed initially, while depreciation recapture awaits sale (or deferral via 1031). This “tax arbitrage” has exploded in popularity post-OBBBA for scaling portfolios tax-efficiently.

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2. Buy, Borrow, Die Strategy

Ultra-wealthy individuals acquire appreciating assets (stocks, real estate, private equity), hold indefinitely to avoid realizing capital gains, and borrow against them at low interest rates (loans are nontaxable). They live off borrowed funds tax-free. Upon death, heirs receive a stepped-up basis to current fair market value, erasing unrealized gains—no capital gains tax paid on pre-death appreciation. This perpetuates low effective rates for families like those of tech founders and investors.

3. Qualified Opportunity Zone (QOZ) Investments

Roll capital gains into a Qualified Opportunity Fund within 180 days to defer tax until sale or December 31, 2026 (for older gains; rolling deferral rules apply post-2026 under permanent program tweaks). Hold 5+ years for basis step-up; 10+ years excludes post-investment appreciation entirely. Real estate dominates QOZ deals, enabling tax-deferred growth in designated zones.

4. Carried Interest in Private Funds

Private equity, venture capital, and hedge fund managers treat their performance allocation (typically 20% of profits) as long-term capital gains (20% + 3.8% NIIT) if holding periods are met, rather than ordinary income (up to 37%). This preferential rate persists despite debates, benefiting top managers on massive sums.

5. Municipal Bonds and Tax-Exempt Interest

Interest from municipal bonds is exempt from federal income tax (and often state tax for in-state bonds). High-bracket investors allocate heavily to munis for tax-free income, enhancing after-tax yields in fixed-income portfolios.

6. Charitable Contributions of Appreciated Assets / Donor-Advised Funds

Donate appreciated securities or property directly: deduct fair market value (subject to AGI limits), bypass capital gains tax on the appreciation. Donor-advised funds provide immediate deduction with deferred, tax-free grant-making. Private foundations offer control and similar benefits for legacy philanthropy.

7. Section 1031 Like-Kind Exchanges

Real estate investors defer gains and recapture indefinitely by exchanging one investment property for another like-kind asset. Basis carries over; no exchange limits. This compounds growth tax-deferred in commercial, multifamily, or other qualifying holdings.

8. Private Placement Life Insurance (PPLI)

Sophisticated life insurance policies wrap investments (equities, alternatives) in a tax-deferred vehicle. Growth accrues tax-free inside the policy; policy loans provide tax-free access to cash value. Death benefits pass income-tax-free to beneficiaries, ideal for alternative asset-heavy portfolios.

9. Qualified Small Business Stock (QSBS) Exclusion – Section 1202

Invest in eligible domestic C-corp startups meeting active business requirements. Exclude up to 100% of gains (greater of $10M or 10× basis) after 5-year hold, often sheltering tens of millions on exits for venture investors and founders.

10. Advanced Estate and Gift Planning (GRATs, SLATs, FLPs, Valuation Discounts)

Transfer appreciating assets into irrevocable trusts (e.g., Grantor Retained Annuity Trusts) or family limited partnerships/LLCs, applying minority and lack-of-marketability discounts (20–40%) to reduce gift/estate tax value. Use annual exclusions and lifetime exemptions to shift wealth tax-efficiently, removing future appreciation from the taxable estate while retaining income/control.

These strategies frequently layer (e.g., MHP bonus depreciation + 1031 + borrowing + trusts) for exponential effects. The OBBBA’s permanent 100% bonus has supercharged real estate deductions, contributing to historically low effective rates for top earners despite high statutory brackets. Risks include audits, recapture on sale, legislative shifts, and requirements like material participation for loss offsets. Always consult qualified tax attorneys, CPAs, and advisors—this overview highlights code incentives favoring investment income over wages, not personalized advice.

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Disclaimer:

The information provided is for informational purposes only and is not investment advice or a guarantee of any kind. We do not guarantee profitability. Make investment decisions based on your research and consult registered financial and legal professionals. We are not registered financial or legal professionals and do not provide personalized investment recommendations.