Question

An investor sold a six-unit apartment building and purchased a 10-unit building with the same market value. The investor gained $40,000 on the sale of the six-unit building but did not utilize a 1031 exchange. Therefore, this gain

a) Is tax-free
b) Must be reinvested in another property to defer taxes
c) Is subject to capital gains tax
d) Can be offset by depreciation expenses

Answer 1

The gain from the sale of real estate by an investor who did not use a 1031 exchange is subject to capital gains tax, meaning option (c) is correct.

Step-by-step explanation:

An investor who has gained $40,000 on the sale of a six-unit building and has not utilized a 1031 exchange is subject to capital gains tax. This means that the investor cannot defer taxes by reinvesting in another property as would be possible with a 1031 exchange. The gain is not tax-free, and while depreciation expenses can be used to offset income on rental properties, it cannot fully negate the obligation to pay capital gains tax on the sale. Therefore, the correct answer to whether the gain is tax-free, must be reinvested, is subject to tax, or can be offset by depreciation is (c) Is subject to capital gains tax. To address parts of the scenario not directly related to the initial question but included in reference information: Sellers like Freda, Ben, if they sell their properties, will also have capital gains to consider if they sell their properties for more than their original purchase price.