Can Long Term Capital Gains be offset with a Short Term Rental Purchase?

[mbhmx2g]

If a second home/vacation condo (paid for) is sold after 10 years of ownership and there is a gain, if that money is used to purchase a house in full, to be used only for rental property, can that entire house purchase be used as a deduction (rental business) that would offset the gains tax for the same year (if all transactions are in the same year)? Please note the original condo was not a rental, it was a second home, and the proceeds from that being used to purchase a rental only for business/profit.

[tagteam · Accepted solution]

If the second/vacation home was held strictly for personal use, then there is nothing that can be done to offset the capital gains with another purchase.

The condo does not qualify for a Section 1031 (like-kind) exchange since it was personal use property and not held for investment.

There is a safe harbor (see link below) for such exchanges but, again, your condo does not appear to qualify.

https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

[Carl]

With the exception of a 1031 exchange, what you do with the proceeds from the sale of real estate doesn't matter. If you have a gain on the sale, that gain is taxable.  Since you state the sold property was a 2nd home/vacation home, it is not eligible for capital gains tax exclusion unless it was your primary residence for at least 2 years of the last 5 years you owned it, counting back from the closing date of the sale.

Since personal use property does not qualify for a 1031 exchange, we can pretty much rule that possibility out.