The IRS has an exchange provision that allows you to put the extra money you make off the sale of real estate into another equal or higher value property without paying taxes on the capital gains. You can’t do this on your primary house, but you can on a beach condo or a rent house. There are some things the experts suggest you do.
Get what the IRS calls a “Qualified Intermediary.” They will charge between $500 and $1500 for the deal. They escrow the money from the time you sell to the time you buy the new property. You must trade up within 45 days of selling and close the deal within 135 days. Make sure your “QI” is bonded and insured for negligence and fraud.
Watch the details. For example, if you bought a property for $200,000 and have depreciated it out for taxes to $100,000. Now you sell it for $400,000. Think you’ll roll over $200,000? Nope. The IRS says you have to drag the depreciation with you – only $300,000 total.
Also, don’t rush to trade up. Sometimes its best just to pay the tax. Don’t end up with something worse or something that appreciates slower than what you had. Its not always a good deal.
Check out 1031.org for the Federation of Exchange Accomodators.