Tips & Traps When Buying A Condo, Co-op, or Townhouse Investors who want to cash in their chips on real estate bought as an investment — but defer the tax bill, in some cases forever — can do so by trading into another piece of property. This strategy isn’t new, but it’s enjoying a resurgence in popularity now because many investors believe that real-estate values have peaked in some markets. They want to lock in their gains and shift into other holdings without a big payment to Uncle Sam. The stratagem is called a 1031 exchange, but it doesn’t actually require you to swap property with another real-estate investor. You sell one property and buy another, carefully abiding by certain restrictions and time limits.

“It’s the best-kept tax secret,” says Stephen A. Wayner, first vice president at Bayview Financial Exchange Services LLC, a unit of Bayview Financial, a Miami real-estate investment, development and mortgage-finance company. “There are so many people that should be doing it. They just don’t know about it.” The tax savings can be substantial — and by deferring the tax bill, investors have more capital to reinvest into the next property. Take, for instance, an individual who purchased a rental duplex 10 years ago for $150,000 that’s now worth $500,000. If he simply sold the property, he would owe $52,500 in capital-gains taxes. (This doesn’t include any state taxes that might be imposed, nor does it include any depreciation recapture tax which could be owed if the owner took deductions for depreciation.)

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