The 1031 "Like-Kind" Exchange
The 1031 Exchange provides for a tax-deferred benefit on capital gains, and is not a tax free transaction as is commonly touted by accountants and investors. The tax code states "No gain or loss shall be recognized on the exchange of property held for productive use in trade or business, for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for other productive use in trade or business or for investment purposes" (Section 1031).
Generally, owners of rental and investment properties can defer their capita! gains taxes until they actually sell their property. A like-kind exchange of property for property does not by itself create a taxable event.
There are any rules and limitations on what the IRS defines as "like-kind" and property exchanges can be quite complex. Competent tax and/or financial advisors should be consulted.
BENEFIT TAX LAWS
No Capital Gains Tax
Because of favorable legislation passed in May of 1997, most homeowners can benefit yearly by paying zero in federal capital gains taxes when they sell their home.
For single filers, up to $250,000 in capital gains can be excluded on their tax returns. For couples filing jointly, up to $500,000 in gains can be excluded.
There are two other basic requirements in order to avoid these taxes. Firstly, the homeowner must have been the owners' primary residence for at least 2 of the past 5 years prior to the sale. Second, owners can not have sold another primary residence in the 2 years prior to the new sale.
There are 3 other minor requirements that most people will not have to worry about. Generally, however, the vast majority of homeowners will pay nothing for capital gains taxes when it comes time to sell their home. A tax advisor or accountant can assist with the necessary fifing requirements.