An investment property can be exchanged for another
investment property with the tax on the gain deferred. The tax basis is
moved from the old to the new.
More or less the way this works is the second has to be worth more
then the first. Trading across or up. Hence the downsize idea will only
work if the second place costs the same or more (and is just smaller).
The roles are very specific. You can mix (some deferred and some
taxes due) so you can trade down and reduce the tax immediately due.
The property has to be a investment property and not a personal
residence. Not sure if a zero rent investment property will cleanly pass
the test.
Posted by Eric Schmidt on September 17, 2004 at 07:10:23:
This is a very basic question from a very green new guy. I am wondering what the tax obligation is for selling a 2nd dwelling and re-investing. I have a buddy who owns the house his Uncle is living in and wants to sell to get him into something more managable and cost effective. IE Condo or smaller house closer to where he lives.
I guess my question is, is there capital gaines to pay or is it waved if the money is re-invested in another 2nd dwelling?
To avoid capital gains (postpone them really) you would perform a 1031 exchange. There are companies that provide this service for a fee. Keep in mind that there are rules surrounding what you can and can’t do with a 1031.
Or your friend can move in to that home and live there for 2 years before selling it. By living in a home 2 out of any 5 year consecutive time period capital gains are avoided.