Last week, I wrote about the capital gains taxes that are applied when selling a personal residence. There's an IRS rule stating that if you have lived in a property for two out of the last five years, you can get a $250,000 deduction off the sale profits if you're single, or $500,000 if you're married.

This isn't a once-in-a-lifetime thing—taxpayers can claim this deduction every two years. Many folks who haven't sold in decades still think there is a one-time deduction of capital gains for those over 55. But that law went out in 1997 under Bill Clinton's administration. There are other factors for whether you owe capital gains taxes or not, such as income and "boot," so I recommend talking to a CPA before filing or amending your return.

But what happens when you sell an investment/rental property?

A 1031 tax exchange—often called a "like-kind exchange"—is a provision in the Internal Revenue Code (specifically Section 1031) that allows investors to defer capital gains taxes when selling a property and reinvesting the proceeds into a "like-kind" replacement property. It's like swapping one investment property for another, while hitting the pause button on your tax obligations for a later year. That's called winning!

The idea behind a 1031 exchange is to encourage continued investment rather than triggering a tax liability on the sale of an asset generating income in that next tax year. Basically, you can roll those gains into a new "like-kind" investment, allowing you to keep building wealth over time.

What skullduggery is this? It's real and the first question I ask someone wanting to sell a rental is "do you plan on doing a 1031 exchange upon the sale"—or, do you plan on paying taxes on your profit when you file your taxes the next April?

There are rules that must be followed, like engaging a "qualified intermediary" and strict timelines for identifying "like-kind" replacement properties. And under a 1031 exchange you can't touch any of your proceeds, except to purchase the next property.

There are a few other considerations and formulas to figure out how much you will be taxed and how much you'll roll into the next purchase ... and the next and the next. The taxes will always be a liability, but you don't have to pay them until you decide to liquidate your properties once and for all. Again, talk to a CPA!