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"DON'T
PLAN", NOW; DON'T PAY LATER!
“Don’t Plan” Now, Don’t Pay
Later!
Sometimes a Client will ask, "How long must I hold a property for
investment before I can 'safely' convert the property to my principal
residence?" The reason for this question is because of the different
ways principal residences and investment properties are treated by the
Internal Revenue Code. Internal Revenue Code
Section 121 deals with the sale of principal residences. It can be
summarized as follows: a taxpayer can sell a principal residence
without ANY tax liability if a) the taxpayer has maintained the
property as his principal residence for two out of the last five
years, b) the taxpayer has not claimed tax exemption under this rule
within the last two years, and c) the gain excluded does not exceed
$250,000 for a single individual, $500,000 for a married couple.
Homes for sale in Boise
Internal Revenue Code Section 1031 deals with the exchange of real
property held for investment, or real property used in trade or
business. It can be summarized as follows: any real property held for
investment can be exchanged for any other real property held for
investment without recognition of gain (without current tax liability)
provided the taxpayer does not receive any non-like-kind property as
part of the exchange.
Unlike Section 121, Section 1031 does not require any specific
duration of ownership prior to transfer of the property. Neither does
Section 1031 require any specific duration for which the acquired
property must be held for investment. Taxpayers usually want to first
use Section 1031 to exchange into investment property and avoid
current tax liability. Then, the same taxpayer desires to convert the
same property into a principal residence, and two years later use
Section 121 to avoid all tax liability upon the sale of the property.
Section 1031 requires that the taxpayer intends to use the property
for investment. Whether a taxpayer intends to use a property for
investment will be determined by all the facts and circumstances. What
the taxpayer can not do is use Section 1031 to exchange into
investment property and then, as part of a plan, convert the
investment property to principal residence. Nevertheless, an
unanticipated change in situations could lead a taxpayer to reasonably
change the intended use of a property, converting the property from
investment use to principal residence. Hypothetical examples of such
changed situations might be: a change in the health of the taxpayer, a
change in the economic condition of the taxpayer, a change in the
investment potential of the property, or any other change of situation
that reasonably justifies the conversion in use under the totality of
the circumstances. Homes for sale in Boise
Conclusion:
In order to combine the tax benefits of Section 1031 with Section 121,
a creative lack of planning is required.
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