You turn your current house into a rental, you start depreciating it at the price you paid for it. eg You bought it for $150k, that is what your depreciable basis is. If it is worth $250k, you don't get to depreciate that extra $100k. When you sell it years down the road, you pay taxes on the $100k of gain. Where if you sell it now, you get the $100k gain tax free and the new rental you buy for $250k you get to depreciate the rental at the $250k basis. And then when you sell it, you pay capital gains on the gain from $250k and not $150K (this is ignoring depreciation recapture). There by saving the taxes on the $100k capital gain.
The downside to the 1031 exchange is that you have to keep in the rental game. If you ever get sick of being a landlord or want to use the money for something else, you then have to pay the taxes. But yes, it is best to never sell real estate.
The downside to the 1031 exchange is that you have to keep in the rental game. If you ever get sick of being a landlord or want to use the money for something else, you then have to pay the taxes. But yes, it is best to never sell real estate.