Selling Homestead That Was Used As A 1031 Exchange
I would appreciate information on the following scenario.
An apartment house that had been 100 % depreciated over the period of 30 years was exchanged in 1998 in a 1031 exchange for a single residence. There was no boot. This residence was then rented out for a little more than two years. Then it was converted into the owner's homestead. The owner lived in it for a little more than 2 years.
The house will now be sold. What are the capital gains consequences if any?
It appears that up to $250K (per taxpayer) can be excluded from capital gains.
Depreciation will still be recaptured for the period of rental use.
Thank you for your answer. But when you say depreciation for the time of rental use will be recaptured, do you mean for the rental use before the exchange or the rental use after the exchange.
Thank you,
Marianne
Depreciation for the property relinquished in the exchange has already been factored into the cost basis of the replacement property.
I was only referring to the rental use of the replacement property.
Since the property was used as a primary residence for the past 2 out of 5 years, the first $250K in profit (per taxpayer) can be excluded from capital gains tax. I disagree in that the depreciation will not be recaptured. Check with an accountant for sure though.
I'm not sure why my last reply to this post was deleted so a private message indicating why would be appreaciated.[ Edited by DaveT on Date 11/11/2003 ]
Thanks for all the input. It seems even accountants don't agree on the depreciation question. Since this law is so new, there is not enough precedence.
If anyone has experience with this scenario, please post a reply.
What is the specific area of disagreement?
Depreciation recapture has been around since 1986 -- not quite a new law. Which new law are you referring to?[ Edited by DaveT on Date 11/11/2003 ]
Thank you for your reply. I'm talking about the 1996 law pertaining to the sale of homesteads.
What is your opinion about the recapture of depreciation that was taken BEFORE the 1031 exchange?
In my opinion:
In a 1031 exchange depreciation becomes a reduction in the basis of the relinquished property. The basis of the relinquished property is added to whatever new cash is added to the purchase of the replacement property to establish the cost basis of the replacement property.
This new cost basis is used to determine the depreciation basis for the replacement property. Upon sale of the replacement property, only the depreciation taken for this property is considered.
If this is an issue for you, please consult your own professional tax advisor for specific details.