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Tax Free Exchanges: Watch Out for the New
Residence Rules
by Phil Craig
© Phil Craig, All Rights Reserved
http://www.LivingTrustSecrets.com
On October 22, 2004, President Bush signed tax legislation that
contained a provision affecting Internal Revenue Code section 1031
(the like-kind tax-free exchange rules).
Under this new provision a taxpayer who exchanges under Internal
Revenue Code section 1031 into a rental house as a replacement
property for a previous investor property and later converts it
to his or her primary residence, is not allowed to exclude gain
under the principal residence exclusion rules of Internal Revenue
Code section 121, unless he/she sells the property at least five
years from the date of its acquisition.
The results of this additional requirement to Internal Revenue Code
section 121 is that anyone exchanging into a rental property that
they such subsequently convert to personal use will have to wait at
least five years from the date of acquisition before they can sell
it as their residence and exclude any gain under Internal Revenue
Code section 121.
The change to the home seller rules of Internal Revenue Code section
121 became effective for principal residence sales occurring on or
after October 22, 2004. Any taxpayer who previously acquired
their
current residence through a tax-deferred exchange within the past
three years will now have to wait at least another two years before
selling their home and excluding any gain, provided they meet the
two out of the five-year occupancy test for living in the property.
New legislation created in 1997/1998 allows taxpayers to exclude
capital gains tax on their profits from the sale of their principal
residence up to $250,000 for single taxpayers and up to $500,000 for
married taxpayers provided they have lived in their principal residence
for two out of the past five years. Taxpayers can exclude this
gain
any number of times provided they have met the two out of the five-year
occupancy test.
Good luck and until next time,
Phil Craig
P.S. Did you
know you can search this site or the web for more Living Trust, Wills,
Estate Planning and Probate answers?
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Phil Craig is a licensed attorney and entreprenuer.
He started practicing law at age 25 in 1979.
He does not take on any more clients, but is
advisor to some of the biggest names in the internet
world. He shares his knowledge gained over the
last 25 years at his Living Trust Secrets newsletter site:
click here=========>http://www.LivingTrustSecrets.com
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