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Jonathan RexfordFL

1031 and 121

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Got a questions regarding 1031 and 121’s Got a friend….REAL. He has 7 days left to declare for 1031. He has a 100K gain. He wants to 1031 into a property rent it for a year and move in it for 2 years and then sell for the 121 exemption. I thought that may not happen. He is freaking me out on some seminar BS and I am wanting to clarify it. He has an accountant that I know but I am not too sure of his ability. Thanks in advance.

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He has 7 days left to declare for 1031. He has a 100K gain.

 

Not quite sure what you mean by this. Has your friend already sold his relinquished property, and his identification period is about to expire? Please clarify.

 

The strategy is flawed. It takes five years of ownership to qualify for the Section 121 capital gains exemption when the property was originally acquired in a 1031 exchange.

 

Acquire as relinquished property in 1031 exchange, rent at least one year, then convert to primary residence is OK. However, just occupying as primary residence for two more years does not quite get your friend where he wants to be. He has to own the property a full five years before he qualifies for the capital gains exclusion.

 

This timeline only applies to property originally acquired in a 1031 exchange, then converted to a primary residence. If the property were originally acquired outside a 1031 exchange, then the two year ownership and occupancy rules are in effect.

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Sorry for confusion. He sold his property durning the exchange period. His 45 days is up in 7 days. For Section 121 my understanding is that a owner must occupy for 2 of the last 5 years of ownership. Is that correct?

 

I am just concerned with the first part of transcation. His basis of his exchange in the begining is 68K. He sold and had a 100K gain. Now he wants to buy a property rent it for at least a year. Then move in. I think he is assuming that he must own it for 2 years before he can sell. I guess that is the part is flawed.

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For Section 121 my understanding is that a owner must occupy for 2 of the last 5 years of ownership. Is that correct?

 

I am just concerned with the first part of transcation. His basis of his exchange in the begining is 68K. He sold and had a 100K gain. Now he wants to buy a property rent it for at least a year. Then move in. I think he is assuming that he must own it for 2 years before he can sell. I guess that is the part is flawed.

Yes, under normal circumstances, the Section 121 qualification only requires two years of ownership and occupancy. However, when you want to use Section 121 on a property originally acquired in a 1031 exchange, the ownership period to qualify for the capital gains exclusion is five years. Only two years of occupancy are required, but five years of ownership is needed.

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Yes, you are correct. It is probably too late for this particular transaction, but wanted to post a response for future searches. Your friend would have to live in the propert for at least 24 months out of the last 60 months in order to qualify for the 121 exclusion.

 

In this particular case, your friend has sold his rental property via a 1031 exchange. Your friend can identify and acquire another like-kind replacement property as part of the 1031 exchange. The replacement property should be held as investment property for at least 12 to 18 months or more in order to qualify for 1031 exchange treatment. Once the property has been held for 12 to 18 months or longer your friend can move into the property and convert it to his/her primary residence. Your friend would have to continue to own the property and live in the property as his/her primary residence for 24 months and then he/she would qualify for the 121 exclusion.

 

The 121 exclusion will only exclude capital gain taxes; it will not exclude any depreciation recapture charges if any.

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Bill forgot the rest of the timeline.

 

Let's review for clarity.

 

When a property is acquired in a 1031 exchange, the taxpayer can use the Section 121 capital gains exclusion only after:

  • Five years of ownership, which includes,
  • At least one year of investment use, and,
  • at least two years occupancy as a primary residence

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The IRS has recently issued guidance in the areas of vacation property, second homes and converted primary residences in terms of what type of property would qualify for 1031 exchange treatment and holding requirements. Review Revenue Procedure 2008-16 at http://www.exeter1031.com/1031_exchange_re...re_2008_16.aspx.

 

I'm posting this link for anyone that has subscribed to this thread.

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Here we go again. The Housing and Economic Recovery Act of 2008 has modified Section 121. The modification essentially limits the amount of gain that a taxpayer can exclude on the sale of his personal residence based on the amount of time that the property was held as investment realty before it was used as their personal residence.

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The modification essentially limits the amount of gain that a taxpayer can exclude on the sale of his personal residence based on the amount of time that the property was held as investment realty before it was used as their personal residence.

Both before and after, not just before. It's prorated: (taxable percentage) = (time as investment) / (total time owned). (taxable percentage) X (total gain) = (taxable gain).

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Hi Randian,

 

No, I'm sorry, that is not correct. There is an exception contained in the modification to Section 121 so that if the homeowner moves out and converts their home to any other non-qualified use AFTER it was a primary residence the homeowner will still qualify for the tax free exclusion under Section 121 provided they meet all of the other requirements under Section 121. Read Section 3092 in the Housing and Economic Recovery Act of 2008 for verification.

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Bill,

 

I have some reservation with your interpretation of the new §121 rules and the exceptions for periods of non-qualified use.

 

I believe the intent of the exception is to recognize that in this real estate market, property does not sell very quickly. Homeowners may have to move out of their primary residence and leave it on the market for some time before it is sold. This period where the vacant property is not in use as primary residence, but just sits on the market pending sale, is not counted as a period of non-qualified use.

 

However, if the homeowner vacates the property and converts it to a rental, then the period of rental use does count as a period of non-qualfied use even if it occurs within the 60 month lookback period.

 

Just how I see it.

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No Bob...the yellow zone is for unloading and loading of passengers only, the RED ZONE is for temporary parking of emergency vehicles..

(crap...I need to watch that movie again to get it right...)

Quick!!! someone name that movie!!!

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