Seller Liable for Taxes on Capital Gains from Stock Sale

  Question: We have made a significant amount of money since we began investing in the stock market in the early 1980’s. We are concerned about the recent volatility of the stock market, however, and we would like to “cash out” our investments at their current high price. We would then use the sale proceeds to buy a small parcel of land in Payson to build our retirement home. Would this transaction be a tax-free exchange, or would we have to pay income tax on the capital gains that we have made on our investments in the stock market?

  Answer: A taxpayer is only eligible for a tax-free exchange of investment property under Section 1031 of the Internal Revenue Code if “like kind” investment property is being exchanged. Inasmuch as your investments in the stock market are personal property, and the Payson land is real property, there is not an exchange of “like kind” investment property. Therefore, you will probably have to pay capital gains tax when you sell your investments in the stock market. In general, the exchange of any investment real estate is a tax-free exchange under the Section 1031 rules. For example, exchanging a rental home for raw land, and exchanging an office building for a warehouse, should both be tax-free exchanges.