If you own investment property and you need to sell a specific property, you can exchange that proper for another property and defer the capital gains tax on the sale. Here are a few of the high points of tax free exchanges.
- You can sell the property to one buyer and purchase your exchange property from a different seller. It's called an exchange, but it's actually two exchanges. You exchange your property for money then the money for your new property, but the key is --
- You can't touch the money yourself -- it is kept by an escrow company until you close on your purchase. Many local title companies can fulfill this role.
- You have to follow the rules to a 'T', or the IRS will disallow the exchange and you will owe full taxes on the sale. In this instance, it is absolutely necessary to work with a real estate agent specializing in exchanges plus a good real estate and/or tax attorney and a CPA. Find an agent who can put the team together with you.
- You have to purchase at least as much property in dollar terms as you sold. You can purchase more, but not less. If you're doing an exchange, you will come out with at least as much debt as you started with because of this.
- You have a limited time to identify the replacement property and a limited time to complete the sale. Your best bet is to have one or more potential replacements in mind before the sale of your current property is completed.
- Consult with professionals on your specific case -- attorneys, local real estate agents and CPAs. My purpose here is to let you know that there is such a creature as a "tax free" (really tax-deferred) exchange, so you can get the appropriate professionals working on yours. As I said before, you have to follow the rules to a 'T'. Get competent advice before you sign a sales contract, or better still before you even list your property for sale.