Sales, Trades, Exchanges
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Can you sell rental property and reinvest it into rental property without paying capital gains tax?
No. 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 (PDF), 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, equal to the amount of the postponed gain. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. For more information refer to Publication 544 (PDF), 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 (PDF), Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.
References:
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