1031 Exchange FAQ
Beaufort and Morehead City, North Carolina
Information Taken From www.irs.gov
Can you sell rental property and reinvest it into rental property without paying capital gains tax?
No. A deferred exchange will be treated as a sale rather than a tax free exchange if the taxpayer actually or constructively receives money on other property in full consideration of the relinguished property. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544, Sales and Other Dispositions of Assets.
References: Publication 544, Sales and Other Dispositions of Assets
I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property. If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. The basis of the property received is the basis of the property given up, increased by the money paid. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. Deferred exchanges will be treated as a sale rather than an exchange to the extent that the taxpayer actually or constructively receives money or other (not like kind) property in exchange for the like-kind property given up. For more information refer to .Publication 544, Sales and Other Disposition of Assets, and Form 8824 (PDF) Instructions, Like-Kind Exchanges.
References: Publication 544, Sales and Other Dispositions of Assets, Form 8824 (PDF), Instructions, Like Kind Exchanges
We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.
References: Publication 544, Sales and Other Dispositions of Assets, Form 8824 (PDF), Like-Kind Exchanges, Form 4797 (PDF), Sale of Business Property and Form 1040, Schedule D (PDF), Capital Gains and Losses
Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523, Sale of Your Home.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523, Selling Your Home.
References: Publication 523, Selling Your Home, Form 1040, Schedule D (PDF), Capital Gains and Losses
The information provided here has been collected from the IRS Website and is not guaranteed or endorsed by Copeland Real Estate. For more information, please contact www.irs.gov or a 1031 exchange qualified intermediary.
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1031 Exchange FAQ |
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