Unlike homesteads the IRS requires investors to pay hefty capital gains taxes (aprox 25% of gain plus deprecation recapture) when an investment property is sold. Those taxes can be avoided if you complete a 1031 Exchange.
The basic idea is that if you buy a “like / kind” property and follow some basic rules you can roll the money from one property into a new property and avoid paying capital gains. I’ve helped a few clients complete these exchanges and they are pretty straight forward so long as the rules are followed.
Rule 1. Both the old property and new property must be held for investment or used for business purposes.
Rule 2. Replacement property must be named with in 45 days of closing on the old property.
Rule 3. Purchase of new property must be completed within 180 days of the sale of the old property.
Rule 4. A qualified intermediary must be used to handle funds between the two closings. I’ve used 1031 Exchange Corp here in Austin and I recommend them.
When completing a 1031 exchange it is critical to work with a broker (like myself) who is well versed in the rules of an exchange. Simple mistakes can cause the whole exchange to be voided and cost thousands of dollars in taxes.