New 1031 Laws

Retroactive to January 27, 2005, new rulings
now allow sellers who have lived in a home 2 out of the last 5 years and rented
it out to avoid paying capital gains tax by combining the principal residence
rule (Code 121) with tax-deferred exchanges (Code 1031). This new ruling does
not apply to all 1031s, just ones where the seller claimed the home as her
former residence.

As long as the
property is being exchanged, the first exception can exclude either $250,000 as
a single person or $500,000 as
married.

…Basically, if you own a
home and live there for two years and then rent it for another two you could
exempt the gain of up to $250K for single filers or $500K for married
couples.

Retroactive to January 27, 2005, new
rulings now allow sellers who have lived in a home 2 out of the last 5 years and
rented it out to avoid paying capital gains tax by combining the principal
residence rule (Code 121) with tax-deferred exchanges (Code 1031). This new
ruling does not apply to all 1031s, just ones where the seller claimed the home
as her former residence.

As
long as the property is being exchanged, the first exception can exclude either
$250,000 as a single person or $500,000 as married. Then the remaining gain,
even attributable depreciation, can be deferred under Section 1031. Even boot is
OK because it’s taken into account only to the extent it exceeds the amount of
the gain excluded under Section 121. So sellers, under certain circumstances,
can also receive cash
back.

Basically, if you own a
home and live there for two years and then rent it for another two you could
exempt the gain of up to $250K for single filers or $500K for married couples.
And any gain over $500K could be 1031 exchanged to another investment
property.

“For the first
time, the IRS is allowing taxpayers to mix the rules on principal residences and
investment property,” said Rob Keasal, accountant and real estate tax
specialist. “The new rules do not apply to all 1031 exchanges, only those that
feature the use of a taxpayer’s former primary residence.”
Inman had this quote.

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