When I sell my N.J. rental home, can I buy in Florida and defer taxes?

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Q. I have a second home which is a rental in New Jersey. I’m a resident of the state but I’d now like to sell the rental and buy a home in Florida. Do I have to pay capital gain taxes even if I buy another house? I was told I have 45 days to buy another house without having to pay taxes. Is that correct?
— Homeowner

A. There are different rules for the sale of rental property and personal residences.

When you sell a rental, you can’t defer the taxes by buying a personal residence, said David Ritter, chair of the tax practice at Brach Eichler in Roseland.

You didn’t say whether the property you want to buy in Florida is for personal use or rental.

If you are selling a rental property in New Jersey and purchasing a new rental property in Florida, you can defer the tax from the sale by following the detailed rules of Internal Revenue Code Section 1031, Ritter said.

He said the requirements of Section 1031 are very detailed.

“In many ways, it is form over substance and the proper form and proper documents must be in place prior to the sale of the New Jersey rental property and the proceeds of the sale cannot be accessible to you except in accordance with the Treasury Regulations and an `exchange agreement’ that you need to enter into with a `qualified intermediary,’” he said.

And there are two relevant time periods.

The first time period is 45 days from the sale of the New Jersey property, Ritter said.

This is the time period you have to actually identify the “replacement property” that you intend to buy and identification must be in accordance with the Treasury Regulations.

The second time period is 180 days or the due date — including extensions — for filing your income tax, whichever is later. This is the date by which you must close on the acquisition of the “replacement property.”

“The requirements for such a `like kind’ exchange are detailed and you should not undertake the transaction without the assistance of a professional that regularly provides guidance in such transactions,” he said, recommending you work with a qualified attorney, accountant or other professional in the real estate “like-kind” exchange business.

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This story was originally published on Dec. 2, 2020.

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