Can my Dad 1031 exchange a house inherited from his parents?

September 10, 2003

Subject:  Rental House

From:  Laurie
Date:  Wed, 30 Jul 2003

My dad inherited his parents' house, but has never lived there himself. He has been renting it out for 10 years. Can he sell it and reinvest the money into a larger rental house without paying capital gains? If so, how long does he have to reinvest that money?

Any advice would be much appreciated.

Thanks,
Laurie

Answer

Date:  Fri, 29 Aug 2003

Hello Laurie,

If your dad wants to do this, he should consult with a tax advisor. He could make a tax-deferred exchange. As I said for another question, this may not be as good a deal as it appears, because the maximum federal tax rate for long-term capital gains is currently 15%. By paying the tax, he could exchange a 15% tax on the gain for getting depreciation deductions at a higher tax rate benefit, as high as 35%.

When you make a tax-deferred exchange, the money is reinvested, tax deferred, until you sell the replacement property.

Good luck!
Mike Gray

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