Q: My wife and I have 12 rental houses that we have owned for many years. We’ve been thinking about selling our rental houses and buying a commercial building so we are only dealing with one property instead of 12. Our concern though is that if we sell our rentals, the capital gains tax is going to kill us. It would be like handing over two or three of the properties to Uncle Sam. We’re open to suggestions. Any thoughts?

A: Yes, though first I must do my usual disclaimer; I am not acting as an attorney, tax advisor nor an accountant and you should consult one that specializes in what I am about to tell you.

There is a way to avoid paying capital gains on your investment properties. It is called a “1031 Tax Deferred Exchange.” Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes if they purchase a “like-kind” property (used for business or investment) following the rules and regulations of the Internal Revenue Code. “Like—kind” property can include, but is not limited to, any of the following, provided it is held for investment: single-family rental (house or condo), duplex, apartment, commercial property and vacant land. For example, a single-family rental can be exchanged (sold) for vacant land, apartments or a commercial building. In addition, properties can be exchanged anywhere within the United States. A key point here is that the replacement property must be equal or greater in value. The same holds true for the debt on the replacement property. You can also use this to downsize your real estate portfolio. If you wanted to buy a property for $150,000 less, then you would only owe capital gains on the $150,000. Another key point is that a qualified intermediary is required for the transaction. This is not a do-it yourself type of thing. There is a lot more information involved in a 1031 exchange, but not enough room here to tell you about all of it. If you would like more information about 1031 exchanges, contact me and I will gladly discuss it with you.

Home maintenance tip

Did you know that your sinks, bathtubs, showers and floor drains have a trap that holds water so sewer gases don’t back up into your home? If you look under your sink, you will see a pipe that is shaped like a “J”. The curve holds water; that’s the water trap. If you have a drain that has not been used for an extended period of time, the water in the trap will evaporate allowing sewer gases to vent into your home. To prevent this from happening, at least once or twice a year, run some water through the drain. For basement floor drains, pour a bucket of water down the drain. You might have even heard a noise coming out of these unused drains when the plumbing system is used somewhere else in your home. That’s because the water has evaporated out of the drain trap. I go into the basement of many homes and can smell sewer gas. I look down the floor drains with my flashlight and can see that it’s dry. Hope this helps.

Steve Meyers is a real estate agent/Realtor at Realty Executives Home Towne in Shelby Twp. He can be contacted with questions at 586-997-5480 or email him at Steve@MeyersRealtor.com You also can visit his website at AnswersToRealEstateQuestions.com.