Transaction tax

Liz Weston: Do ‘similar’ commercial real estate investments defer capital gains taxes?

Dear Liz: My husband and I are selling commercial property for $600,000 and we have questions about capital gains. Our real estate agent said we had 90 days to buy another property, but suggested we not make a purchase due to the the state of the economy right now. We are looking for suggestions to reduce our capital gains. Do you have any suggestions we could look into or articles to read?

Answer: Your real estate agent refers to what is called a “like-kind” or Exchange under Section 1031. These exchanges allow people to defer capital gains taxes when selling commercial, rental or investment real estate as long as the proceeds are used to purchase a similar property.

Section 1031 exchanges happen all the time, in all sorts of economic conditions, so your real estate agent’s attempt to dissuade you based on “the state of the economy” is a little odd. Also, similar exchanges do not have to be completed in 90 days. Owners have 45 days to identify potential replacement properties and a total of 180 days to complete the transaction. There are a number of other rules you need to follow, so you will want to use companies known as exchange facilitators who specialize in handling these transactions.

Your first step, however, should be find a qualified tax professional. You’ve just discovered what can happen when you turn to non-tax professionals for tax advice.

While your desire to educate yourself is commendable and you can certainly find tax books at your local bookstore, there is no substitute for consulting an experienced tax professional who can give you personalized advice.

Liz Weston, Certified Financial Planner, is a personal finance columnist for Nerd Wallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.