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Avoid capital gains tax when selling investment property

Dear Clients and Friends,

Did you know that it may be possible to avoid paying immediate capital gains taxes when you sell an investment property? It’s true if you’re planning to sell the property shortly afterward.

Suppose you own a condo as an investment and you plan to sell it and use that money to buy another investment property. You might be able to treat the sale and the subsequent purchase as a “wash,” and defer paying any capital gains tax on the first property until you sell the second property.

This is known as a “like-kind exchange” or a “1031 exchange” (after the tax code that allows this).

There are some restrictions. For example, the second property must be of “like kind” – it does not have to be the exact same kind of property. In general, you have to identify the second property within 45 days of selling the first property and you have to close on the second property within 180 days of selling the first property. (In some cases you can identify several properties within 45 days as long as you close on one of them.)

The proceeds from the initial sale must typically be held by a specifically qualified third party while they’re waiting to be used to purchase the new property.

In certain cases, it may be possible to close on the second property even before you close on the first one.

In the past, 1031 exchanges, almost always involved real estate, but people are increasingly using them for other types of investment property, such as art. However, in order to qualify for such a tax break, you would have to show that you’re actually in business as an art investor – simply selling a painting in your bedroom and replacing it with a new one probably wouldn’t qualify.

A 1031exchange can be complicated and there’s a lot of technical paperwork. But it might be well worth the effort if you can defer a significant capital gains tax.

Call us for a free phone evaluation of a legal problem you or yours may have regarding your estate planning interests.



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