There is an old saying "When There is a Will, There is a Way" And many people definitely have a desire to avoid capital gain taxes when selling investment property.
Tax Loophole: When one kind of investment real estate is traded for another, the capital gains tax is fully deferred.
Generally you are not required to report a taxable gain when business or investment property is exchange for "like kind" business or investment property. The key here is the term "like kind" which refers to the characteristic of the property - NOT it's quality. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality.
Examples of Exchanges:
1. Exchange a rental apartment in the city for a rental home in the country.
2. Exchange a city block for farm land
3. Exchange a rental house for a commercial building.
Note: If cash is received in a tax-free exchange you may have to report and pay capital gains taxes based upon the cash received.
The possibilities and options are many. Imagine trading a rental home with a low monthly cash flow for a commercial building with a higher monthly cash flow, just because the owners want to retire?
The most common type of Exchange is known as the Forward Delayed Exchange. The Taxpayer sells investment property and will acquire a replacement property of equal or greater value within 180 days. There are stick stipulations and loads of paper work; you will need a real estate professional or attorney that specializes in 1031 Exchanges.
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