Capital gains and 1031 exchanges

[Justin Petrides]

I own my home outright. It was gifted to me over a year ago. I am planning on selling it within the next few months . I plan on using some the money from the sale as a down payment on a multi family that I will live in. Being new to this I have a few questions. 1- Do I need to pay capital gains on this money if I don’t use it all as a down payment ? 2- Does this situation qualify for a 1031 exchange ? 3- Can I use a portion of the sale money towards closing costs and other fees associated with the new property?

[Paul Allen]

From the limited information you provided:

1. You need to pay capital gains tax on the difference between the sale price and your basis regardless of whether or not you invest it in something else. 

2. If you are using the property for personal use it does not qualify for a 1031 exchange. (You called it 'my home' so I am assuming it is your residence.)

3. You can use your money however you like, but it will still be taxable.

Highly recommend sitting down with a tax professional and figuring out your exact situation. You may have options for reducing your taxes that aren't apparent from your post. New RE investors frequently try to save a couple hundred bucks by 'doing it themselves', and it ends up costing them thousands in taxes that could have been avoided.

Best of Luck with Your Real Estate Investments!