New real estate rule thwarts investor’s tax strategy

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DEAR BOB: I bought a rental property in 1991, which I sold for $450,000. To avoid capital gain tax, I used an Internal Revenue Code 1031 tax-deferred exchange to buy another rental property for $450,000. After renting it for 12 months, I moved in and have lived in it for 24 months. If I sell this property at the same $450,000 price, will I owe any capital gain tax since I made no profit? Is this a good way to avoid capital gain tax? --Sim Y. DEAR SIM: Nice try! But Uncle Sam is way ahead of you. Your adjusted-cost basis for the $450,000 rental house you acquired in an Internal Revenue Code 1031 tax-deferred exchange was not $450,000. Purchase Bob Bruss reports online. Instead, it was your $450,000 purchase price minus the deferred capital gain on your old rental property minus the depreciation you deducted on the acquired property during the 12-month rental period before you moved in to make it your principal residence. Although you owned and occupied the acquired property as your prin...