26 Nov Can I reduce capital gains tax on a depreciated rental property?

Q. Is there any financial instrument I can buy to reduce capital gains taxes when I sell a fully depreciated rental property?

— Owner

A. We hope this property has been a profitable one for you.

And now that you’re selling, you know the government wants to get its due.

The taxable income realized on the sale of depreciated real estate cannot be deferred or reduced by the purchase of a financial instrument, said David Ritter, chair of the tax practice at Brach Eichler in Roseland.

But rental real estate can be sold and the proceeds reinvested into “like-kind” real estate to defer the tax from the sale of the rental property, he said.

He said the rules for this `like-kind’ exchange are set forth in Internal Revenue Code Section 1031 and the Treasury Regulations and other IRS pronouncements under that Code Section.

“There are many detailed rules that must be followed including the establishment of a `qualified intermediary’ to act as the intermediary for a sale and purchase (exchange) that is not simultaneous,” Ritter said. “Most of the exchanges are not simultaneous.”

Because the rules are so specific, we recommend you work with a tax professional who can guide you through such an exchange.

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This story was originally published on Nov. 26, 2020.

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.