Avoiding Capital Gains Tax on Stock Profits Used to Buy Home

  Question: We have made a significant amount of money in the stock market. We would like to “cash out” our investments in the stock market and use this money to buy a second home in Flagstaff. If we use the money from the sale of our investments in the stock market to buy this second home will we have to pay tax on the capital gains that we have made on our investments in the stock market? In other words, can we do a “1031 tax-free exchange” of our investments in the stock market for this second home?

  Answer: A taxpayer is only eligible for a tax-free exchange of property under I.R.C. Section 1031 if “like kind” property is being exchanged. The investments in the stock market are personal property, and the second home is real property. Therefore, there is no exchange of “like kind” property, and you should owe capital gains tax if you sell your investments in the stock market.

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