We own 4 rental properties. Will we still owe deprecion recapture tax on 1 we sell if we apply all "gains" to the principal balances on 2 of the other rental properties?

[turtleboy1969]

Not sure if a 1031 Exchange will work in this situation. But perhaps something else would apply. Or maybe a 1031 would work if we use an LLC?

[PaulaM · Accepted solution]

That isn't how a 1031 exchange works. You can't defer the gain by paying the principle of rental property you currently own.

Basically, you would have to purchase a replacement property for the property you sold in order to defer the gain on the sale (within a defined time period).

You can read about the section 1031 IRS code in the link below.

https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031

http://www.1031exchange.com/faq/