My sisters and I inherited a rental property. My dad passed away in 2007 amd because of some disputes our names were not on the deed until 2010. There was no mortgage on the property when we inherited it. Last year we made a small profit in rentals which was pretty much offset by expenses. When we sell the property will we have to pay capital gains tax on the selling price? If I were to take that profit and buy another investment property would I avoid this tax?

1. Yes you would have to report the sale, and would have a taxable gain on the difference between your portion of the proceeds from the sale and your cost basis. Your cost basis would be your portion of the fair market value of the property as of the date of your father's death in 2007, plus the costs of any capital improvements you may have made since then, minus any depreciation you have claimed on the property. The tax on this gain is calculated at two different rates - one for the capital gain on the property (exclusive of depreciation) and a different rate on the recapture of the depreciation.

2. Yes you can defer capital gains tax if you purchase another rental property, through a "like-kind exchange." Your purchase price for the new property must be higher than what you sell the original property for. More info from the IRS here: Like-Kind Exchanges - Real Estate Tax Tips (http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html)

Thank you, that is very helpful. How long would you have to purchase the new property after the sale? Would the value of the new property have to exceed my portion of the sale or the entire sale price? If the property in question is a condo could I purchase a house? A mobile home? Land? Or must it be another condo?
I would guess the capital gains tax to be about 25%,is that correct? Would I have to pay taxes in the state I live in or to the state the condo is in?

How long would you have to purchase the new property after the sale? Would the value of the new property have to exceed my portion of the sale or the entire sale price? If the property in question is a condo could i purchase a house? a mobile home? land? or must it be another condo?
I would guess the capital gains tax to be about 25%,is that correct? Would I have to pay taxes in the state I live in or to the state the condo is in?

Please don't use the "comment" feature to ask follow up questions. Use the answer box instead.

To qualify as a "like kind" exchange you must use a specific process that avoids taxes by putting the proceeds of the original sale aside with a "quaified intermediary" while you look for the new property. It's similar to putting the money in escrow - your real estate broker should be able to describe how it works. Here's a helpful article on it: 1031 Tax Exchange - Defer Capital Gains Tax (http://www.1031taxexchange.org/)

The value of your investment must exceed the value of your proceeds from the sale of the original property.

Like-kind applies if you sell one rental property for another, regardless of whether it's a house, condo, mobile home etc.

The capital gains tax rate depends on your adjusted gross income, but are generally 20% for federal. And yes, you have to pay taxes in the state where the property is located, and also report it to your home state. But for your home state you take a credit for taxes paid to other jursidictions, so at the end of the day you aren't double taxed on the sale - the only tax this generates in your home sate is if the tax rate is higher than the tax rate in the state where the property is located.

I suggest you read through Pub 544, especially the section on like-kind exchanges and deferred exchanges: Publication 544 (2009), Sales and Other Dispositions of Assets (http://www.irs.gov/publications/p544/ch01.html#en_US_publink100072371)