In 2020, I had a client sell a rental property for about $250,000 and sell their “forever home” for well over $1 million. They were shocked by how large the tax bill was for the rental property and how low it was for the primary residence. This has to do with certain tax breaks on the sale of a primary residence and the deferred nature of taxes on investment property.
Similar to your 401(k), the tax deferral looks great on paper as your balance sheet grows. Also similar to your 401(k), the tax bill will make you angry when you go to cash in your chips. However, in the rental business, there is an option to defer your taxes on the gain, so long as you meet certain requirements. At a very high level, 1031 exchanges allow you to exchange one investment property for a “like-kind” property and defer the taxes until you sell that next property.
