Tax-Efficient Investing for High Earners

High earners often face a different investment challenge than other investors. The issue is not necessarily generating more income, but retaining more of it after taxes.

As income rises, tax drag accumulates across multiple sources: ordinary income taxes, capital gains taxes, the 3.8% net investment income tax (NIIT) that applies above certain income thresholds, and taxes triggered by portfolio turnover. For investors in higher brackets, managing these exposures often becomes as consequential as selecting the investments themselves.

Tax-efficient investing for high earners typically addresses this challenge through five strategies: real estate and depreciation, tax deferral, diversification across tax buckets, tax-advantaged income sources, and tax-efficient real estate transitions. This analysis examines how each works and the role it can play in keeping more of an investor’s return invested and compounding.

Understanding Tax Drag

Tax drag is the reduction in investment returns caused by taxes. While investors often focus on pre-tax performance, after-tax returns ultimately determine how much wealth remains available to compound over time.

The impact compounds significantly over time. The table below models three scenarios over twenty years:

• Investor A: an investor whose returns are not subject to annual taxes
• Investor B: an investor whose returns are taxed at the 20% long-term capital gains rate
• Investor C: an investor whose returns are taxed at the top 37% ordinary income rate.*

*These scenarios reflect federal income tax only. High earners also owe a 3.8% Net Investment Income Tax on investment income, and residents of states that tax investment income owe additional state tax, so the after-tax returns shown are a floor. In high-tax states, the combined rate on ordinary investment income can exceed 50%.

The difference appears small in a single year. Over two decades, the gap between tax-free compounding and returns taxed as ordinary income reaches nearly $2 million on a $1 million portfolio.

The goal of tax-efficient investing for high earners is to maximize the portion of those returns that remains invested and compounding after taxes. The five strategies below address that objective from different angles, depending on the investor’s income profile, asset mix, and long-term goals.

Tax-Efficient Investing for High Earners: Five Core Strategies

High earners typically do not rely on a single tax strategy. Instead, they combine several approaches that work together to limit what taxes take from growth and income over time.

Real estate is among the few asset classes that can deliver income, depreciation benefits, and tax-deferral opportunities within the same structure, which is why it appears across multiple strategies below. The sections below examine each strategy in detail, including how it works and the tax benefits it may provide.

1. Real Estate and Depreciation

Real estate can generate income, provide appreciation, and reduce taxable income within the same investment. Its primary tax advantage is depreciation: each year, an investor deducts a portion of the building’s cost without a corresponding cash outflow.

Because depreciation is a non-cash expense, an investor can receive more cash flow than is reported on the tax return.

Example

Assume a multifamily property generates:

The investor receives $100,000 of cash flow but reports only $60,000 as taxable income, before other deductions and expenses.

Two points clarify how the benefit actually works:

Depreciation reduces the property’s own income without restriction. Passive activity limitations generally become relevant when depreciation and other deductions create losses that exceed the property’s income. That excess loss generally cannot offset wages or business income; it can only reduce tax on other passive investments. Investors who qualify as real estate professionals under IRS rules may apply those losses against ordinary income, though the qualification requirements are substantial.

Depreciation defers tax rather than eliminating it. Each deduction reduces the investor’s adjusted basis in the property, so a larger portion of the eventual sale becomes taxable. The depreciation-attributable gain is recaptured at sale, taxed at a maximum of 25%*.* The investor still benefits: deductions reduce taxable income at ordinary rates as high as 37%* during the hold period, and the recapture is paid later at a capped rate, with the difference remaining invested in the meantime.

Best Suited For:

• High earners seeking tax-efficient income
• Investors building long-term wealth through income-producing assets
• Business owners and professionals evaluating ways to reduce tax drag
• Investors seeking diversification beyond traditional stocks and bonds

*This article was produced by an independent third party. This article should not be considered a solicitation or recommendation. Any such recommendation or solicitation would be made under separate cover. We do not endorse or accept responsibility for the content of any third-party website.

2. Tax Deferral

Tax deferral allows investors to postpone taxes, so more capital remains invested and continues to compound. Instead of paying tax annually on gains and income, certain structures allow tax recognition to be deferred to a later date. For high earners, the most common options are tax-deferred retirement accounts and, for real estate, the structures below:

Every dollar not paid in tax today is a dollar that stays invested and keeps compounding. Taxes generally come due later, when assets are sold, or funds are withdrawn, though deferred gains may ultimately be eliminated through a stepped-up basis at death.

Best Suited For:

• High earners seeking to reduce the impact of annual taxes on portfolio growth
• Investors with long time horizons who prioritize compounding over immediate liquidity
• Business owners and professionals in higher tax brackets
• Property owners evaluating 1031 exchanges, DSTs, or 721 UPREIT exit options

3. Diversification Across Tax Buckets

Many investors diversify across asset classes. High earners often diversify across tax treatments as well.

Rather than holding all capital in taxable accounts, investors may allocate it across taxable, tax-deferred, and tax-advantaged real estate structures. This creates greater flexibility over when income is recognized, how withdrawals are structured, and which assets are drawn on to meet future liquidity needs.

The objective is not to avoid taxes altogether. It is to avoid concentrating the entire future tax obligation in a single account type or investment structure.

Example

A high earner with a $5 million portfolio might allocate across three structures:

Rather than relying on a single structure, the investor can draw on whichever source best fits the tax environment, cash flow needs, and investment objectives at the time.

Best Suited For:

• High earners building long-term wealth
• Investors seeking flexibility around future withdrawals
• Business owners and professionals with growing taxable income
• Investors concerned about future tax-rate uncertainty

4. Tax-Advantaged Income Sources

Not all investment income is taxed the same way. Interest, qualified dividends, capital gains, rental income, and real estate distributions each get different treatment, which can lead to very different after-tax results.

Many high earners look not just at how much income a portfolio produces, but at how heavily that income is taxed. Sometimes an investment with a lower headline yield can leave more after tax than one paying fully taxable income.

Example

Two investments each produce $100,000 of income a year:

Real estate’s actual tax depends on ownership structure, depreciation, the passive activity rules, and individual circumstances. High earners may also owe the 3.8% NIIT on certain investment income once modified adjusted gross income exceeds applicable thresholds.

Best Suited For:

• High earners seeking current income
• Investors focused on after-tax cash flow rather than headline yield
• Professionals and business owners weighing the after-tax value of different income sources
• Investors weighing income real estate alongside traditional income investments

5. Tax-Efficient Real Estate Transitions

One of the biggest tax hits for high earners comes when an appreciated property is sold. Capital gains tax, depreciation recapture, and state tax can substantially reduce the capital available for reinvestment.

Tax-efficient transition strategies let an investor reposition a property, step back from management, diversify, or raise cash while keeping the tax deferred. The common tools are 1031 exchanges, Delaware Statutory Trusts (DSTs), and 721 UPREIT exit options.

Instead of treating a sale as the end of the investment, these structures keep the capital working while the investor moves into a different ownership structure or goal.

Example

An investor owns a multifamily property worth $5 million with a $1.5 million basis, so a direct sale would create a $3.5 million taxable gain.

*Full deferral assumes all proceeds are reinvested, and any debt is replaced.

Among these options, the 721 UPREIT path depends on what the investor owns. With Bonaventure, a multifamily owner can contribute the property directly into the operating partnership of the Bonaventure Multifamily Income Trust** (BMIT®), the firm’s own multifamily REIT, in exchange for operating partnership (OP) units. Because the operating partnership acquires the contributed property, the property must fit the REIT’s multifamily portfolio.

An owner whose property is not multifamily, such as land or a smaller asset, can still reach the same destination. A 1031 exchange into a DST that holds qualifying real estate provides a fractional interest in an institutional-quality property. Held as an investment in its own right, that interest may later be contributed to the REIT, moving the owner from a smaller, actively managed asset into passively managed, institutional-quality real estate.

Best Suited For:

• Property owners with highly appreciated real estate
• Investors looking to defer capital gains taxes
• Owners stepping away from active property management
• High earners who want to stay invested in real estate
• Families weighing long-term wealth transfer and estate planning

For many high earners, preserving wealth is not only about earning returns. It is also about protecting capital during major transitions. These structures allow investors to remain invested while pursuing new income, diversification, and estate-planning goals.

Building After-Tax Wealth Through Strategic Planning

Tax-efficient investing for high earners focuses on reducing tax drag while maintaining exposure to growth, income, and long-term compounding. For many investors, that means drawing on several of these strategies together, including depreciation, tax deferral, tax-efficient income sources, and real estate transition tools.

Bonaventure works with property owners, financial advisors, and CPAs to evaluate multifamily real estate strategies that align with each investor’s tax situation, income needs, liquidity goals, and long-term wealth objectives. Rather than applying a one-size-fits-all approach, the firm helps investors evaluate and structure solutions based on their specific circumstances, whether the priority is generating income, diversifying concentrated holdings, reducing management responsibilities, facilitating a 1031 exchange, or supporting estate planning goals.

With more than 26 years of multifamily investment experience, over $600 million of the firm’s own capital invested alongside clients, and $1.6 billion facilitated through 1031 and 721 exchanges, Bonaventure brings the experience, alignment, and execution capabilities that tax-efficient real estate strategies demand.

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