Owners who sell an investment property (one that’s not owner-occupied) before they’ve held it for one year are required to treat the sale as a short-term capital gain and pay tax at ordinary income tax rates. The rate can go as high as 35 percent depending on the person’s tax bracket. That means your clients could lose much of their gains. If they hold the property for a year or more before selling, sale proceeds are considered long-term capital gains and are taxed at a 15 percent rate.

One way your clients can defer any tax obligation on the sale of investment property that’s not owner-occupied is to plow their proceeds into property equivalent in value under Section 1032 of the Tax Code. Owners have up to 45 days to identify a comparable property and 180 day to conclude the transfer.

As a real estate professional, you can help your clients find the property and make the sale, but an exchange intermediary must handle the exchange end of the deal. For more information on 1031 exchange, click Current Links at REALTOR.org/realtormag.

Article: Realtor Magazine, By. Robert Freeman, National Association of Realtors, June 2005 – P15.