Net Unrealized Appreciation: 2026 Tax Strategy for Real Estate Investors

For real estate investors and business owners in 2026, net unrealized appreciation represents one of the most powerful yet underutilized tax strategies available. Specifically, this strategy targets employer stock held in qualified retirement plans. As a result, investors can convert ordinary income rates of up to 37% into favorable long-term capital gains rates as low as 0%, 15%, or 20%. Therefore, understanding net unrealized appreciation is essential for anyone holding company stock in a 401(k) who wants to maximize after-tax wealth.

Table of Contents

• Key Takeaways
• What Is Net Unrealized Appreciation?
• How Does Net Unrealized Appreciation Work in 2026?
• Who Qualifies for NUA Treatment?
• What Are the Tax Benefits of Net Unrealized Appreciation?
• When Should You Use the NUA Strategy?
• How to Execute an NUA Distribution
• Common Mistakes to Avoid with NUA

• Uncle Kam in Action: Real Estate Investor Saves $87,000

• Next Steps
• Frequently Asked Questions
• Related Resources

Key Takeaways

• Net unrealized appreciation lets you convert ordinary income into capital gains tax rates for employer stock distributed from qualified plans in 2026.
• However, NUA treatment requires a lump-sum distribution of the entire plan balance within one tax year.
• Essentially, only the cost basis faces ordinary income tax rates — all appreciation qualifies for long-term capital gains treatment regardless of holding period.
• As a result, real estate investors with substantial employer stock positions can save tens of thousands using this strategy.
• Therefore, strategic tax planning is essential to maximize NUA benefits and avoid costly triggering event mistakes.

What Is Net Unrealized Appreciation?

Here’s how most retirement distributions work: you pull money from a 401(k), and the IRS taxes every dollar as ordinary income at rates up to 37%. That’s the default. However, the NUA strategy carves out an exception for employer stock that has appreciated inside the plan.

Specifically, when you take a qualifying lump-sum distribution that includes employer securities, the IRS splits the tax treatment. First, the cost basis — what the plan originally paid for the stock — faces ordinary income tax. Then, the appreciation above that basis (the NUA portion) receives long-term capital gains rates when you eventually sell. That rate maxes out at 20%, compared to 37% for ordinary income. In other words, the spread between those rates is where the savings live.

A Simple Example

For instance, say your 401(k) holds $500,000 in employer stock with a cost basis of $100,000. Without NUA, rolling everything into an IRA and eventually withdrawing means the IRS taxes the full $500,000 as ordinary income — potentially $185,000 in federal taxes at the 37% bracket. In contrast, with NUA, you pay ordinary income tax on the $100,000 basis ($37,000) and long-term capital gains on the $400,000 appreciation ($80,000 at 20%). Consequently, total tax drops to $117,000. That’s $68,000 in savings on a single transaction.

Why Real Estate Investors Should Pay Attention

In particular, real estate investors often accumulate employer stock through previous W-2 careers, company equity compensation, or business ownership structures with employer-sponsored plans. Additionally, if you transitioned from corporate America to full-time real estate investing, there’s a strong chance you’re sitting on appreciated employer stock in an old 401(k). Therefore, the NUA strategy lets you extract that wealth at capital gains rates instead of ordinary income rates — freeing up capital for property acquisitions at a significantly lower tax cost.

How Does Net Unrealized Appreciation Work in 2026?

The mechanics require precision. Most importantly, one wrong move — like rolling the stock into an IRA first — destroys the NUA benefit permanently. Here’s the step-by-step process:

The Distribution Mechanics

Specifically, the distribution must satisfy all of these requirements simultaneously:

• Lump-sum distribution: You must distribute the entire balance of all like-kind employer plans within a single tax year
• Triggering event: You must have experienced one of four qualifying events — separation from service, reaching age 59½, disability, or death
• Employer securities: The stock you distribute must come from the employer that sponsored the plan
• In-kind transfer: You must move the stock directly to a taxable brokerage account — not sell it inside the plan and not roll it into an IRA

Meanwhile, non-stock assets in the plan (mutual funds, bonds, cash) can and typically should roll into an IRA to maintain tax deferral. In other words, only the employer stock needs to go to the taxable account. Furthermore, this split distribution approach is standard and fully permitted under the IRS rollover rules.

Tax Treatment Breakdown

Component	Tax Treatment	2026 Maximum Rate
Cost Basis of Employer Stock	Ordinary income (you pay tax in year of distribution)	37%
Net Unrealized Appreciation	Long-term capital gains (you pay tax when you sell the stock)	20%
Post-Distribution Appreciation	Short-term or long-term capital gains (based on holding period after distribution)	20% (long-term) / 37% (short-term)
Non-Stock Plan Assets (rolled to IRA)	Tax-deferred until you make future IRA withdrawals	37% (at withdrawal)

Who Qualifies for NUA Treatment?

According to IRC Section 402(e)(4), the four triggering events include:

• Separation from service: In short, this means leaving the employer through retirement, resignation, or termination. Notably, this is the most common trigger for real estate investors who left corporate careers.
• Reaching age 59½: Importantly, no separation is required. You can still work for the employer and take the distribution.
• Disability: Specifically, as defined under IRC Section 72(m)(7), this means the inability to engage in substantial gainful activity.
• Death: In this case, beneficiaries of the plan participant can use NUA on inherited employer stock.

However, one critical detail stands out: self-employed individuals cannot use separation from service as a triggering event. Therefore, if you own your own business with a solo 401(k), you’ll need to reach age 59½, become disabled, or pass away for NUA treatment to apply. Given these points, plan accordingly.

The Lump-Sum Requirement

This is where most people trip up. In essence, a lump-sum distribution means you must distribute the entire balance of all qualified plans of the same type with that employer within a single tax year. For example, if your employer has both a 401(k) and a profit-sharing plan, you must distribute both fully. Moreover, partial distributions do not qualify. In other words, you cannot take out just the employer stock and leave the rest — you must move the entire plan balance, whether to a taxable account, an IRA rollover, or a combination.

What Are the Tax Benefits of Net Unrealized Appreciation?

In fact, the tax benefits go beyond the rate differential. Here’s the full picture for 2026:

• Rate conversion: The IRS taxes NUA appreciation at 0%, 15%, or 20% capital gains rates instead of ordinary income rates up to 37%
• Tax deferral on NUA: You don’t pay tax on the appreciation until you actually sell the stock — so you control the timing
• Estate planning advantage: If you hold NUA stock until death, your heirs receive a stepped-up basis on the post-distribution appreciation, although the NUA portion remains taxable to heirs
• No RMD pressure: Once stock moves to a taxable brokerage account, it exits the retirement plan system — therefore, no required minimum distributions force sales at unfavorable times
• 3.8% NIIT consideration: While NUA gains may trigger the 3.8% net investment income tax for those above $250,000 MAGI (married filing jointly), the combined rate of 23.8% still beats 37% ordinary income

NUA vs. Traditional IRA Rollover: Side-by-Side

Factor	NUA Strategy	Standard IRA Rollover
Tax Rate on Appreciation	0%–20% (long-term capital gains)	10%–37% (ordinary income at withdrawal)
When You Pay Tax	You pay tax on basis at distribution; you pay NUA tax at sale	You pay tax on all funds at withdrawal from IRA
Required Minimum Distributions	None — stock sits in taxable account	Yes — starting at age 73 under SECURE 2.0
Step-Up at Death	Post-distribution gains only	No step-up; heirs pay ordinary income

When Should You Use the NUA Strategy?

Specifically, NUA makes the most financial sense in these scenarios:

• Low basis, high appreciation: For example, if your cost basis represents 30% or less of the stock’s current value, NUA delivers significant savings. In this case, a $50,000 basis on $300,000 of stock means you save thousands on $250,000 of gains.
• High current income: Similarly, if you fall in the 32%–37% federal bracket, the rate differential to 20% capital gains is substantial. Conversely, the strategy loses impact if you’re in the 12% bracket.
• Near-term liquidity needs: Moreover, if you need cash for a property acquisition, NUA lets you access retirement funds at a lower tax cost than IRA withdrawals.
• Estate planning goals: Furthermore, holding NUA stock until death provides a partial step-up in basis for heirs, which can prove more favorable than inherited IRA rules under the SECURE Act’s 10-year distribution requirement.

On the other hand, NUA may not make sense if your cost basis sits close to the stock’s current value, you fall in a low tax bracket, or you prefer continued tax deferral inside an IRA.

How to Execute an NUA Distribution

Step 1: Confirm Eligibility

Before initiating anything, verify you meet all requirements. Specifically, request a statement from your plan administrator showing the cost basis of your employer stock. Keep in mind that this basis is what the plan originally paid for the shares, not what you contributed. Additionally, if the plan cannot provide this information, documenting NUA treatment on your tax return becomes much harder.

Step 2: Open a Taxable Brokerage Account

Next, set up a taxable brokerage account — ideally at the same custodian as your retirement plan, since this simplifies the transfer. Importantly, this account will receive the employer stock. However, do not open an IRA for the stock — that move eliminates NUA treatment entirely.

Step 3: Request the Lump-Sum Distribution

Then, contact your plan administrator and request a lump-sum distribution. Specifically, the request should include:

• Employer stock transferred in-kind to the taxable brokerage account
• All non-stock assets (mutual funds, cash, bonds) rolled directly to an IRA
• Confirmation that the entire plan balance will clear within the same calendar year

Step 4: Handle the Tax Reporting

After distribution, the plan will issue a Form 1099-R reporting the transaction. Importantly, Box 6 should show the NUA amount. Therefore, work with your tax preparation professional to ensure the NUA appears correctly and that only the cost basis shows up as ordinary income on your return.

Common Mistakes to Avoid with NUA

Specifically, these mistakes destroy NUA eligibility. Therefore, avoid them at all costs:

• Rolling employer stock into an IRA: Once the stock lands in an IRA, the NUA treatment disappears permanently. Consequently, the stock becomes ordinary IRA assets and you pay ordinary income rates upon withdrawal.
• Partial distributions: For instance, taking only the stock and leaving other plan assets for a future year disqualifies the lump-sum requirement. In short, everything must go within one tax year.
• Missing the calendar year deadline: Similarly, if you don’t fully distribute the plan balance by December 31, the distribution doesn’t qualify as lump-sum.
• Forgetting multiple plans: Additionally, if your employer maintains more than one qualified plan of the same type, you must include all plans in the lump-sum distribution.
• Selling stock inside the plan: Also, if you sell the employer stock within the plan and then distribute the cash proceeds, no stock exists to receive NUA treatment. Instead, you must transfer the stock in-kind.
• Ignoring the 10% early withdrawal penalty: Finally, if you’re under 55 in the year you separate from service (or under 59½ for other triggering events), the cost basis portion may face the 10% early distribution penalty. Therefore, plan the timing accordingly.

 

 

Uncle Kam in Action: Real Estate Investor Saves $87,000

David spent 18 years at a publicly traded tech company before leaving to invest in multifamily real estate full-time. During those years, his 401(k) accumulated $720,000 in employer stock with a cost basis of just $140,000 — the rest represented pure appreciation built up during his tenure.

The Challenge: David needed capital to close on a 12-unit apartment building. However, his options looked bleak: (1) roll the 401(k) to an IRA and take withdrawals at 37%, or (2) take a full distribution and pay 37% on the entire $720,000. Either way, he faced a tax bill exceeding $265,000 on the stock alone. In other words, that’s capital he couldn’t deploy into real estate.

The Uncle Kam Solution: Our team identified the NUA opportunity immediately. Specifically, David had a qualifying triggering event (separation from service) and his employer stock had massive appreciation relative to basis — the ideal NUA scenario. Consequently, we structured a lump-sum distribution: the employer stock transferred in-kind to a taxable brokerage account, while $180,000 in mutual funds and cash rolled to an IRA.

The Tax Savings Results

The Results:

• Ordinary income tax on basis: $140,000 × 37% = $51,800
• Capital gains tax on NUA (at sale): $580,000 × 23.8% (including NIIT) = $138,040
• Total NUA tax: $189,840
• Without NUA (all ordinary income): $720,000 × 37% = $266,400
• Total savings: $76,560 in federal taxes

But we didn’t stop there. Additionally, David sold the stock in tranches across two tax years, keeping his capital gains income below the $553,850 threshold where the 20% rate kicks in. As a result, his effective capital gains rate dropped closer to 15%, pushing total savings above $87,000. Ultimately, that extra capital went directly into the apartment deal’s down payment. Our advisory fee totaled $4,500 — a 19x return. See more outcomes on our client results page.

Next Steps

If you hold employer stock in a qualified retirement plan, take these actions now:

• First, request a cost basis statement from your plan administrator to determine the NUA amount
• Then, identify your qualifying triggering event — separation from service, age 59½, disability, or beneficiary status
• Next, calculate the tax savings by comparing NUA treatment versus a standard IRA rollover at your current bracket
• Additionally, consult with a qualified tax advisor who understands NUA mechanics — because the rules don’t forgive errors
• Finally, plan the timing to ensure the full lump-sum distribution completes within a single calendar year

In summary, net unrealized appreciation is one of those strategies where the savings are real, but the margin for error is zero. Uncle Kam specializes in strategic planning for real estate investors and business owners navigating complex retirement distribution decisions. Consequently, we coordinate with your plan administrator, custodian, and CPA to ensure you execute the NUA distribution flawlessly.

Frequently Asked Questions

Can I use NUA with stock from my own company’s solo 401(k)?

Yes, provided your solo 401(k) holds employer securities. However, self-employed individuals cannot use separation from service as a triggering event. Therefore, you’ll need to reach age 59½, become disabled, or pass away for the NUA treatment to apply. Additionally, many solo 401(k) plans don’t hold individual stocks, so confirm your plan document permits employer securities before pursuing this strategy.

What happens if I only roll over part of the employer stock to a taxable account and roll the rest to an IRA?

In fact, you can split the employer stock — send some shares to a taxable account for NUA treatment and roll the remainder to an IRA. Specifically, the NUA benefit applies only to the shares that go to the taxable account. This partial NUA approach works well when you want to manage the ordinary income tax hit on the basis. As long as you fully distribute the total plan balance within one tax year, you satisfy the lump-sum requirement.

Does the 10% early withdrawal penalty apply to NUA distributions?

Importantly, the 10% penalty under IRC Section 72(t) applies only to the cost basis portion of the employer stock — not the NUA amount. Furthermore, if you separate from service during or after the year you turn 55, the penalty disappears entirely under the age-55 exception. For other triggering events, the penalty applies only if you’re under 59½. In any case, the NUA itself never faces the 10% penalty regardless of your age.

Can my spouse use NUA on employer stock I leave them in my estate?

Yes, because death qualifies as a triggering event. Consequently, your surviving spouse (or other beneficiary) can elect NUA treatment on employer stock distributed from the plan. In this case, the beneficiary receives the stock at the original cost basis for NUA purposes. As a result, NUA becomes a valuable estate planning tool — heirs get capital gains treatment on the appreciation rather than paying ordinary income rates through required distributions under the SECURE Act’s 10-year rule.

How does NUA interact with the 3.8% net investment income tax?

When you sell NUA stock, the capital gain counts toward net investment income and may trigger the 3.8% NIIT if your modified adjusted gross income exceeds $250,000 (married filing jointly) or $200,000 (single). As a result, the effective maximum capital gains rate on NUA reaches 23.8%. Nevertheless, even at this rate, it’s significantly lower than the 37% ordinary income rate. Additionally, the cost basis portion — reported as ordinary income in the year of distribution — does not face NIIT since it comes from a retirement plan.

Can I use NUA if my employer stock has declined in value since purchase?

If the stock’s current value falls below the cost basis, there is no NUA — because the appreciation is negative. In this situation, roll the stock to an IRA instead. Essentially, there’s no benefit to NUA treatment when the stock hasn’t appreciated since you’d pay ordinary income tax on a basis that exceeds the stock’s value. Therefore, you’re better off preserving the tax deferral and waiting for the stock to recover inside the IRA.

Is there a deadline to sell the NUA stock after distribution?

No, there is no deadline. Once the employer stock reaches your taxable brokerage account, you can hold it indefinitely. Importantly, the NUA portion retains long-term capital gains treatment whenever you sell — whether that’s one day later or 20 years later. However, any additional appreciation after distribution follows standard holding period rules: hold more than one year for long-term rates, one year or less for short-term rates. In practice, many investors sell immediately to diversify, while others hold for additional growth.

Related Resources

• Tax Strategies for Real Estate Investors
• Comprehensive Tax Planning Services
• Advanced Strategies for High-Net-Worth Individuals
• Uncle Kam Tax Strategy Guides

Last updated: February, 2026

This information is current as of 2/12/2026. Tax laws change frequently. Therefore, verify updates with the IRS or a qualified tax professional if reading this later.