11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges
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:
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:
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:
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