Can You Buy A Second Home and Use A 1031 Exchange?
REM #F724
By Ilyce R. Glink
Summary: A reader is planning on buying a new home and converting his current home to a rental property. He is wondering if he can avoid capital gains tax on a third investment property he owns. Ilyce explains how a 1031 exchange works.
Q: I would like to sell land that I acquired in 1992 without paying capital
gains tax. I am in the process of purchasing a home with my current home becoming
a rental property.
Assuming I don’t sell the land prior to closing on the home, when the
land sells can I use that money to invest in either one of my current homes
without being taxed?
A: The only way I know to defer paying capital gains tax on investment property
is to use a 1031 tax free exchange, and buy a replacement investment property
that costs at least as much as the property you're selling.
Unfortunately, you cannot use a 1031 exchange to purchase a personal residence.
What you can do is use a 1031 exchange to purchase an investment home that you
rent out for a couple of years, after which you may convert it into a personal
residence.
Please consult with a real estate attorney who has done a number of 1031 exchanges
in order to see if this will work for your situation.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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