In 1997, Congress passed new, generous rules that effectively eliminated capital gains on the sale of most people's primary residence,
but what happens if the property owner is selling any other classification of real estate(investment or business property, farm, vacation home, etc.).

They will be taxed on their gain or profit unless they use the IRS Section 1031 exchange rule.

By using Section 1031, the property owner sells their existing non-primary residential property, follows the prescribed rules for handling the sale proceeds and reinvests these proceeds in a new purchase(s) of an equal or greater value.

This technique will not trigger any gain for tax purposes.

Any tax is postponed.
We need to stop thinking of this as an "Exchange" , since this term is unnecessarily confusing.

It is a "sale and new purchase" that are linked by a "legal fiction" that is called an "Exchange".

The sale and new purchase are interdependent.
The property owner can sell to any available buyer and then subsequently purchase whatever they want from whomever that seller may be.

The simplest label to give this technique is "The Investment Roll-Over Rule." Think of this as the "first cousin" to the well known former
"Residential Roll-Over Rule" (formerly Section 1034).

The only noticeable differences are that the time period is shorter - 6 months instead of 2 years and the two events (sale and subsequent purchase) are linked together by certain paperwork.

When should a property owner use this technique.

Anytime they are selling real estate that is not their primary residence and planning to buy something new.

Examples would be selling any non-primary residence real estate to purchase a second home, a farm or any other real estate (vacant lot, rental property, business property, almost any property) that is not going to be used immediately as a primary residence.

If there are plans to later convert the replacement property to a primary residence, this usually will not present a problem.


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