As Congress debates tax reform, one of the more popular ways to avoid capital gains taxes is potentially on the chopping block. However, if that happens, there are other options.
One of the reasons people purchase homes is that the price of real estate almost always goes up. The home is an investment.
When it is sold, it will be worth more than the original purchase price. The seller can use the gain to purchase a better home.
However, there is a potential roadblock in the way.
The difference between the original purchase price and the selling price is a capital gain. It can be taxed, which would make people less willing to sell their homes.
To get around this, the seller can use Section 1031 of the tax code. It eliminates any capital gains tax, if the income is used to purchase something similar, such as another home.
The same logic and rule holds true for other types of investments, including stocks and bonds.
With Congress talking about tax reform and how to pay for it, one thing being considered is to eliminate these 1031 exchanges as Financial Advisor discusses in "What To Do If Congress Eliminates 1031 Exchanges."
While it is probably unlikely that the popular and useful Section 1031 will be eliminated, there is no reason to panic, if it happens.
There are other methods that can be used to reduce or eliminate capital gains taxes that an estate planning attorney can explain.
These methods include things such as grantor retained annuity trusts, charitable remainder trusts and family limited partnerships.
As long as they remain available, you will have options.
Reference: Financial Advisor (Aug. 28, 2017) "What To Do If Congress Eliminates 1031 Exchanges."