When you sell investment property, you probably will owe a steep tax bill. That’s true even if the selling price is low, in today’s market. The reason: depreciation deductions taken in prior years will reduce your cost basis, and a low cost basis is likely to generate a taxable gain on a sale.
You can avoid the tax by implementing a like-kind exchange. Here’s a common sequence of events:
* You sell your property.
* You let an unrelated intermediary hold any money you receive from the sale. This intermediary can’t be a relative or your agent, such as your lawyer or your accountant.
* You buy another investment property. You must follow certain guidelines, such as identifying the new property within 45 days of selling the old one. (A letter to the intermediary will do.) And you must close the deal within 180 days of selling your original property.
* Direct the intermediary to use the cash being held for you to buy the replacement property. The object is to avoid pocketing any cash and to avoid a reduction in mortgage debt, as you go from the old property to the new one. If you follow all the rules, you won’t owe any tax on the sale of your original property.
