Q: My son bought vacant land about 5 years ago with the original intention of building his first home there someday.

He has now decided to buy an existing home and is planning to sell the property. He will realize a $400,000 profit on the sale of the land. What is the capital gains tax percent that he must pay or is there some way he can avoid the tax, since he will be using the profit to buy a home?

A: Congratulations to your son. What a fantastic investment. That profit will certainly give him a leg up on stabilizing his financial future.

In terms of this property, he will owe 15 percent in capital gains tax plus any state taxes owed.

The only way he can defer paying tax is to buy another investment property that costs at least as much as the current investment property sells for. He can then roll over the profits from the vacant land into the new property. He will be able to defer capital gains taxes by using a tax-free exchange.

But this is only for investment property. If he wanted to avoid paying tax on the property, he’d have to build the home and live there as the primary residence for at least 24 months.

There are certain rules he must follow in order to make the 1031 exchange work. If this is a possibility, I’d encourage him to talk to a real estate attorney who does plenty of tax-free exchanges.

Please talk to your accountant or tax preparer for more details.