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Yes. What you've heard about is a transaction commonly known as a like-kind exchange. A like-kind exchange, when properly executed, can postpone the recognition of gain (and resulting current tax) essentially by shifting the basis of property sold to like-kind replacement property. You do this by acquiring a like-kind property, which may be of lesser or greater value.
The basis of the property that you acquire in a like-kind exchange is generally the same as the basis of the property that you transferred. However, if you transfer money or other property (not like-kind) in addition to like-kind property, your basis in the property acquired is the basis of the property given up, increased by the amount of money or other property transferred.
To successfully defer gain in a like-kind exchange, you must comply with certain requirements under section 1031 of the Internal Revenue Code and the regulations thereunder. For example, when you sell your rental property, you can't take actual or constructive receipt of the sale proceeds. You can avoid actual or constructive receipt of the proceeds if you comply with one of the safe harbors, such as using a qualified intermediary or a qualified trust to hold and use the sale proceeds to acquire the replacement property, as set forth in the Income Tax Regulations or certain other publications of the Internal Revenue Service.
You may be able to exclude much of the gain from the sale of your main home that you also used for business or to produce rental income, if you meet the ownership and use tests. However, you may not exclude gain from the sale or exchange of your main home if it's allocable to periods of nonqualified use as detailed in Publication 523, Selling Your Home.
In addition, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you may not exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed (actually deducted) was less than the amount allowable (legally expected to be deducted), you may limit the recognized gain attributable to depreciation to the amount of the depreciation allowed. For tax years beginning in 2013 or later, a simplified method of computing the deduction for the business use of a home that sets depreciation to zero may apply. Please refer to Simplified Option for Home Office Deduction for details.
|You meet the ownership and use tests and there's no business or rental use in the year of the sale||You should report the gain, Section 121 exclusion and depreciation-related gain that you can't exclude on Form 8949, Sales and other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses. For more information, refer to Publication 523.|
|You meet the ownership and use tests but there's business or rental use in the year of sale||You should report the sale of the business or rental part on Form 4797, Sales of Business Property. Form 4797 takes the business or rental part of the gain, the Section 121 exclusion, and depreciation-related gain that you can't exclude into account.|
|The part of your property used for business or rental use is within your home, such as a home office for a business||You don't need to allocate gain on the sale of the property between the business or rental part of the property and the part used as a home. In addition, you don't need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation. However, you can't exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997.|
Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. The Instructions for Form 8824 explain how to report the details of the exchange. Even if you recognize no gain or loss, you must report the exchange.
If you received money or other property (not like-kind) as part of the exchange, you must recognize gain to the extent of the amount of money or the value of other property you received, but you don't recognize a loss. For this purpose, consideration received by a taxpayer in the form of an assumption of a liability by the other party to the exchange or the transfer by the taxpayer of property subject to a liability is treated as money or other property. However, a taxpayer may offset a liability assumed with consideration given by the taxpayer assuming a liability or receiving a property subject to a liability in the exchange. You must report recognized gain on Form 4797, Sales of Business Property, and Schedule D (Form 1040), Capital Gains and Losses. Refer to the detailed section on qualifying like-kind exchanges in Chapter 1, Gain or Loss, in Publication 544, Sales and Other Dispositions of Assets.