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Author: pbpapa One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121258  
Subject: Re: 1031 Exchanges Date: 2/13/2002 7:36 PM
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Got a question about 1031's. My parents own a rental property that has appreciated significantly - from around $175,000 to $500,000. They do not want to have to pay capital gains taxes on this profit and are interested in doing a 1031 to avoid this. They have identified a rental property that costs about $550,000 that they are interested in. Their question is, what happens if they end up selling house #2 down the road and do not make any money on it. Do they still need to pay the capital gains taxes from house #1? Also, what tax implications would it have if they made house #2 their primary residence someday?

That trade (if carried out in accordance with some very strict rules) would qualify as a “non-taxable exchange”. That does not mean tax free. When/if they finally sell #2 (or 3 or 4), they will have a gain calculated from the $175,000 original basis. If, instead, at some later time they convert #2 to their primary residence, they could (still later) sell and avoid capital gain tax. However they would be taxed (at 25%) upon the total amount of depreciation deducted (or allowable) over the years. They definitely need expert help before, during and after any such transactions (the trade and the conversion to personal use).
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