New 5 Yr Holding Required On Sale of Primary Residence When Acquired by 1031
LA JOLLA, CALIFORNIA – William L. Exeter, president and chief executive officer of Diversified Exchange Corporation, announced today that President Bush signed H.R. 4520 into law on October 22, 2004. H.R. 4520 contains certain provisions that affect transactions where an investor has combined a 1031 Tax-Deferred Exchange pursuant to Section 1031 of the Internal Revenue Code with a 121 Exclusion pursuant to Section 121 of the Internal Revenue Code.
The provisions contained within H.R. 4520 created a five (5) year holding requirement for an investor who wants to exclude capital gains pursuant to a 121 Exclusion from the sale of his or her personal residence that was originally acquired as rental property as part of a 1031 Tax-Deferred Exchange transaction.
For example, prior to H.R. 4520, an investor that owned rental property could sell the rental property and acquire another rental property (typically a single family residence) to be held as rental property through a 1031 Tax-Deferred Exchange. After renting the property for 12 months or more, the investor would move into the rental property and convert the rental property into his or her primary residence. Once the investor has lived in the property as his or her primary residence for at least 24 months, the investor could sell the primary residence and exclude up to $250,000 in capital gains if single and up to $500,000 in capital gains if married pursuant to a 121 Exclusion.
Under the new tax law the investor is now required to hold the property for five years before they can exclude capital gains under a 121 Exclusion if the property was acquired as part of a 1031 Tax-Deferred Exchange. The provisions of this new law are effective for personal residence sales occurring on or after October 22, 2004.
“We had expected this tax “loop hole” to be eliminated, so we are very pleased that the strategy of combining a 1031 Tax-Deferred Exchange with a 121 Exclusion was not eliminated but merely restricted with a five year holding requirement, stated Mr. Exeter.
# # #
So does this mean that you must simply own the property for 5 years or live in the property for 5 years?
Although this throws a complication in the mix, would it be possible for someone to simply rent the property for 3 years then live in it for 2?
Of course this is likely impractical because someone who buys their house will want to move in right away and will have to put up with living there 5 years.
Actually, this only applies to properties that were acquired via a 1031 exchange as the replacement property, and then converted into the investors primary residence. It only requires investors to own the property for five (5) years, so the property could be rented for two years to make sure that it qualifies for 1031 exchange treatment and then the investor could move into the property and live there for the next three years and would be able to sell and use the 121 exclusion. This is only/merely a 5 year holding requirement.
If the taxpayer buys a property for their primary residence (not part of a 1031 exchange, but an outright purchase) they would only have to live there and own it for 24 months in order to qualify for the 121 exclusion.
So, if I am following correctly:
Today I sell my primary and reap the 250/500K benefit. Tomorrow I move into my rental NOT derived per a 1031 and convert it to OO. I can still sell in 24+mos. and use my 250K again. However, if I exchange that rental per 1031 tomorrow, rent it out for 12mos., convert to OO, I must live in it for 48mos. to use the 121 Exclusion. Correct?