A friend of mine bought a house in SC a year ago as an investment (jointly with his sister and her ex-husband - nice setup haha ). Now they are planning on selling it and investing in another house. What are the tax implications of this transaction? If they invest the proceeds right away, will they have to pay tax on what they made on the first house?

A friend - why is it always a friend  
 
Investment in a house is basically the same as an investment in stock.  you sell you pay, thats the general rule.  what you do with the funds is a separate issue.
 
exception in real estate is like kind exchange - but they are a dog to find/arrange.  you have to basically find someone that has an investment property that you like and hope that they like yours.
 
 
 

And not even my friend, but my brother's
 
So basically he'll have to declare his share of profit from sale and pay taxes on it even though the purchase of the next investment house might be done the same day and he'll never actually see the money, correct?
He's not going to be happy about it.
 

yes -
 
Next question should be about tax payments.  IRS provides a relatively easy test to waive late payment penalties.  Being that we are near the last quarter of the year you might want mention that he should tell his accountant about this windfall.  It might be in his best interest to file a quarterly estimate tax so to soften the blow in April.  Now if you want to maximize his money, you can legally start doing some tax planning now and test how much(if anything) will be needed to avoid any penalties.  Set aside enough money to offset any tax bill and make it earn money between now(the time he gets it) and April 15th.  Heck open a CD and let it earn some interest over the next few months.

Thank you Frank, I'll give him the happy news

you are welcome
 
hey tell him that paying taxes means that he made more money - thats a good thing.

ORIGINAL: Frankg

exception in real estate is like kind exchange - but they are a dog to find/arrange.  you have to basically find someone that has an investment property that you like and hope that they like yours.

Frank, not to step on your toes, but Like Kind Exchanges are not so prevalent that you would necessarily know all the specifics.  Neither my accountant or my lawyer knew how to do one of these before I introduced them to it.  If I read you right, you suggest it is a property exchange between to parties.  Not true.

I did one of these, and the advantage is great.  You must identify and list by address a few properties you would consider buying with the proceeds before you close on your sale.  These properties can be owned by anyone else.  The proceeds get held by a third party administrator, and you have a limited time to select one of the properties and close on its purchase.  All of the funds in escrow must be spent towards the sale, or they are immediately taxed.  The profit you would have recorded on the property you sold, now reduces the basis on the new property (purchase price less profit earned on previous property), so when you sell the new property, the profit from the old property is simply deferred to the new properties sale, unless you do the LKE again.  I believe you must also add back in any and all of the depreciation taken while the old property was owned and it is also taxed eventually. 


UNLESS, you can roll the LKE into a property that you eventually move into for 2 years, and then sell for a profit with NO TAX!  There is an upper limit on the amount of profit that can be made without tax, but don't remember it without looking it up.

I'm not an accountant, but I did stay at a Holiday Inn Express once.