Q: Marsha, I own a single-family residence that has been a rental for many years. I purchased the house for $100,000, and I think I can sell for about $950,000. I’ve heard about “1031 exchanges” for income property. Can that help me avoid paying taxes? How does it work?
A: I can explain the basic concept of an IRS 1031 exchange, but if you move forward with the exchange, promise me you’ll contact your CPA.
An IRS 1031 exchange is a trade of like-kind investment properties that allows you to defer capital gains taxes on your profit. The definition of “like-kind” is broad; you can exchange your rental for land, commercial, or rental properties. You can’t use a 1031 exchange for your personal residence.