Avoid capital gains tax when selling investment property

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

For instance, suppose you own a condo as an investment, and you plan to sell it and use the proceeds 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 sometimes as a “1031 exchange” (after the section of the tax code that allows this).

There are some restrictions. For instance, the second property must be of a “like kind” (although it doesn’t 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 close on the second property before you sell the first property.

1031 exchanges can be complicated, and there’s some technical paperwork. But it might well be worth the effort if you can defer a significant capital gains tax.

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