Source: The Wall Street Journal —
Thinking about swapping your ski chalet in Aspen for an oceanfront mansion on Miami Beach? If you’ve used your vacation home as an investment property, and collected rental income, you might be able to take advantage of a popular tax break that allows you to defer payment of any capital-gains taxes due on the sale or perhaps avoid them entirely.
Like-kind exchanges, also known as 1031 exchanges for the section of the Internal Revenue Code they fall under, allow taxpayers to exchange real property used for business or investment purposes for like-kind property without paying taxes on the proceeds. Instead, those gains are rolled over until the taxpayer ultimately cashes out by selling the property. Under the tax code, any type of real estate used for business or investment is considered like kind, so vacant farmland can be replaced with industrial property in a 1031 exchange. However, under IRS rules, a home used solely for personal use, whether as a primary residence or vacation home, wouldn’t qualify for like-kind exchange treatment.
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