Editor's Note: This article is part of the Financial Advisor series “How I Solved It.” Advisors describe a client with a problem and what they did to help.

High-net-worth investors who have their wealth tied up in real estate often face hefty capital gains tax bills when they decide to sell their property.

Fred Hubler, founder and president of Creative Capital Wealth Management Group in Valley Forge, Pa., has helped several well-off clients retain their wealth as they withdraw from active property management. Creative Capital offers advice on a retainer fee basis, mostly for high-net-worth entrepreneurs and business executives.

One couple Hubler is assisting owned a mobile home park that they actively managed and which provided them with a $600,000 annual income. Both the husband and wife are in their mid-70s and wanted to retire. Their son, an attorney, did not want to take on the management of the park.

“If they sold the property, they would have faced capital gains taxes of nearly $7 million, which obviously they wanted to avoid,” Hubler said. For this couple, the property in question had formed the cornerstone of their life’s work and their wealth for decades.

Hubler used an IRS strategy known as a 1031 exchange, named for the IRS code that created the strategy decades ago, to help them retire from active management and create a $1.2 million portfolio that did not require them to continue working. The 1031 exchange was done in conjunction with a Delaware statutory trust (also known as an unincorporated business trust). A 1031 exchange can only be used for commercial properties that are deemed “equal” under IRS guidelines.

Using a Delaware statutory trust enables accredited investors to exchange property for other property under certain conditions without paying capital gains taxes on the property being disposed of. It allows the investor to put the money from a single property and invest it in a diverse set of properties through the trust.

The Delaware statutory trust property ownership structure allows an investor to own a fractional interest in large, institutional-quality and professionally managed commercial property along with other investors—not as limited partners but as individual owners through the trust.

“A 1031 exchange is used very seldom because finding properties that qualify as being equal, which is required under the IRS code, is difficult,” Hubler said. “There now are companies that help find ‘equal’ properties and make the arrangements for the property owners.”

One of the most important parts of any 1031 exchange, he said, is using a qualified intermediary. Hubler advised using only intermediaries with a good reputation in order to avoid fraud at the time of the sale of the property when the intermediary receives the money.

The intermediary also has to make sure certain dates are adhered to. For instance, a replacement property has to be found within 45 days after the sale of the property, and closing has to take place on the new property within 180 days.

By using a 1031 exchange, the client can create a diversified portfolio with higher cash flow, potential capital appreciation and an inflation hedge.

“These transactions can be complicated, but no one said it would be easy to defer capital gains,” Hubler said.

The other advantage of the arrangement is that when the property owner dies and the investment is sold, there is a “step-up” in value. For tax purposes, the value is set at current market value, reducing capital gains taxes to very little or zero.

“Therefore, the son will inherit the full value,” Hubler said.

The couple is now in the process of working with a buyer to make a recommended switch. They will no longer have to manage property because the Delaware statutory trust sponsor will make the property decisions and the couple will have a diversified portfolio based on real estate, Hubler said.

“This strategy is not for everyone. It is only for accredited investors with at least $1 million in investable assets, or an income, for a couple, of at least $300,000 annually, but it is advantageous for some,” he added.