Today TaxMama hears from Lucylle in the TaxQuips Forum, with this question. “We want to sell our vacation home in Maine and buy another. Will we have to pay capital gains tax on it even if we buy another of equal value?”
Yup. That rollover option was available for personal residences – but has not been part of the law for over a decade.
Of course, you could do something called a Section 1031 exchange. This is a special tax-free exchange where you can exchange investment property or business property for a property of a similar nature. That would allow you to sell the vacation home, identify a replacement within 45 days and finish the purchase within 180 days.
In order for this to work, the timing must be perfect. All the steps must be done in order. You cannot have access to the money from the sale of your home. You must use an accommodator or trustee – who holds your money until you need it for the new purchase. If you mess up any part of the procedure, you’ve wasted your time and money. The sale of your property will be fully taxable.
Even if you do it right, if you don’t put in your own money to cover the commissions and escrow costs, parts of your exchange will be taxable anyway. (It’s complicated.)
On the other hand, what kind of profit are you looking at? Especially after you deduct the costs of commissions and escrow fees or legal fees? With a 15% top tax rate in effect on long-term capital gains, your taxes may be lower than costs involved with the 1031 exchange. Please take that into account.
Especially since people get so caught up in the tax-free exchange, that when they find themselves running out of time, they will buy just any old property, even if it’s inadequate, just to meet the deadlines.
And remember, you can find answers to all kinds of questions about tax-free exchanges and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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