Categories: Taxes & Insurance

Trading Places to Avoid Taxes

If you own investment property, a sale can trigger a large taxable gain. That’s true even if the property’s selling price has fallen. Over the years, depreciation deductions reduce your tax basis in the property and thus may produce a surprising taxable gain.

One solution is to enter into a “like kind” exchange under Section 1031 of the tax code. Suppose you live in Virginia and own an investment property there. You would like to retire in Florida and not manage the property long-distance.

One approach is to sell your property and arrange for the money from the sale to be held by an unrelated intermediary. Then you can look for investment property of equal or greater value near your retirement destination. Once you close a deal, you can tell the intermediary to use the money to buy the replacement property.

If done properly, such a deferred exchange can enable you to own investment property in Florida instead of Virginia, without owing tax. You can obtain any kind of replacement property, not necessarily the same type.

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