Question: We originally intended to build a home on 5 acres of vacant land we bought in Pinetop several years ago. We now want to be closer to our elderly parents who live in Fountain Hills, and we are thinking about buying a home in Fountain Hills. If we trade the Pinetop land for a home in Fountain Hills will we have to pay capital gains taxes on the profit from the sale of the Pinetop land? In other words, can we do a 1031 tax-deferred exchange by exchanging the 5 acres of vacant land for a home already built?
Answer: You can generally trade “like-kind” investment property to avoid capital gains taxes. Any real estate, whether vacant land, a home, or an office building, is “like-kind” property. Land owned for the purpose of building your own home, however, is probably not investment property. Therefore, you should contact a CPA or other tax specialist to see if there would be a taxable capital gain on the transfer of the Pinetop land for a Fountain Hills home.