Say you own a highly-appreciated vacation home that you’re ready to unload for whatever reason. If you simply sell it, you could face a whopping big income tax bill. See my earlier column on that unfortunate outcome. Ugh. But if you’re still bullish on real estate and not a fan of paying taxes unnecessarily, you could instead swap your vacation home for another vacation home or virtually any other type of real property in a tax-deferred exchange under Section 1031 of our beloved Internal Revenue Code. Believe it or not, the IRS has supplied the recipe for how to exchange a vacation property tax-free, but it may take you some time to make it work.
I’ll tell you how to do it. But first, some necessary background information. What is a Section 1031 exchange? Here are the basics When available, a tax-deferred Section 1031 exchange is a great tool for real estate owners. It allows you to unload one property (the relinquished property) and acquire another one (the replacement property) without triggering a current income tax bill on the relinquished property’s appreciation (the difference between its fair market value and its tax basis). The untaxed gain gets rolled over into the replacement property where it remains untaxed until you sell the replacement property in a taxable transaction. But if you still own the property when you die, any taxabl …