05 Dec I’m selling an investment house. Can I avoid capital gains taxes?

Q. Hello. I’m thinking of a 1031 exchange. I currently have a two-unit house. The new place I would get could be a potential retirement home for me, eventually. So if I buy a one-unit house that I still rent out, would this be eligible for the 1031 or do I have to buy a two-unit again?
— Investor

A. A 1031 exchange is a big bonus in the tax code for real estate investors.

It allows the investor to exchange one property for another without having to pay capital gains taxes — if you follow the rules.

To qualify for a 1031 exchange, the properties must be “like-kind,” said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“That means whatever you receive must be the same nature as the one you’re relinquishing,” Karu said. “Since both are rental residential properties, it should qualify.”

1031 exchanges come with very specific rules, Karu said.

“You must identify the replacement property within 45 days following the sale of your property and must purchase it within 180 days of the closing of the property you sold,” he said. “When you file your tax returns, the 1031 exchange gets reported on Form 8824.”

Keep in mind that any cash you receive may be taxable, Karu said. The technical term for cash received is “boot.”

For example, if the selling price for the property is $500,000 and the purchase price of the replacement property is $450,000, there will be an immediate recognition of the $50,000 difference received by the seller, he said.

Most importantly, be sure to have a qualified intermediary handling the transaction for you. As always, consult with your tax advisor to make sure it is beneficial for you and, if so, that you meet the guidelines.

Email your questions to .

This story was originally published in December 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.