Can I sell one rental property and reinvest the profits into another rental property I own?

I have two rental properties that I have mortgages on. I'd like to sell one and take the money earned from the sale to pay down the second rental property. What capital gains tax will I have to pay? Is there a way not to pay capital gains since I'm reinvesting into another rental property I own?

Real Estate, Taxes
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March 2017

Real estate investors must sell a rental or investment property and must acquire an interest in rental or investment real property in order to qualify for a 1031 exchange. The pay down of a debt on other property is not an acquisition of an interest in real estate but a payment toward a debt or personal property versus real property. Additionally, a 1031 requires like kind property and in terms of real estate, is defined as any interest in real property as long as it was held for rental or investment use. A mortgage or other type of debt on property is not a real estate interest. If cash is received from sale of property, taxes are due.

Depending on the amount of funds you will be receiving from the sale of one of your rental properties, you may be able to engage in a bifurcation of a 1031 and/or a Deferred Sales Trust (DST). The DST is a tax code compliant strategy which reduces the capital gains tax impact while creating the opportunity to earn investment income on your money you would have paid to the IRS.

One of the most significant benefits of using a Deferred Sales Trust is that there are a broad variety of investments that can be selected to secure the principal and return specified in the note, as opposed to a 1031 exchange where only compliant, like kind property can be acquired. This creates an opportunity to exit real estate, to diversify investments, to create the potential for liquidity within the selected investments, and to satisfy a variety of taxpayer risk tolerances. Investments can include, but are not limited to, mutual funds, ETFs, REITs, stocks, bonds, managed accounts, annuities, life insurance, etc.

March 2017