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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

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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

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