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Q. Can I ever do a like kind exchange on my residence?
A. Not really, but consider the following:
First, under the Taxpayer Relief Act of 1977, if a taxpayer sells a personal
residence he or she has lived in for two of the past five years, he or she can
exclude from taxable income up to $250,000.00 (up to $500,000.00 for a married
couple) in capital gain on the residence (excluding gain attributable to
depreciation taken in connection with the rental or business use of the property
for periods after May 6, 1997). Generally, this is far better than doing an
exchange, since the capital gain has been permanently excluded, not merely
defered.
Second, if your residence is part of a property only partly used for
residential purposes, you may be able to do a tax free exchange for the part of
the property used for other purposes. Thus, in the case of a family farm, you
may be able to do a tax free exchange of the farm portion of the property, while
doing an IRC 1034 roll over of the tax basis of the residential portion into a
new residence.
Third, it is important to note that converting a property held for investment
into a personal residence is not a tax event. Thus, a taxpayer who holds
appreciated property can exchange it for residential property pursuant to
Section 1031 of the Internal Revenue Code, hold the residential property as an
investment, and, later, convert it to a personal residence. After living in the
personal residence for two years, it can be sold and $250,000.00 in gain (up to
$500,000.00 for a married couple) can be excluded from taxable income. There is
no clear rule as to how long the taxpayer would have to hold the property for
investment, but all tax advisers I have spoken with are very comfortable with a
two year holding period. Keep in mind that a later conversion of replacement
property acquired in an exchange should not be the taxpayer's intent at the time
he or she performs the exchange. At that point, the intent must be only to
acquire property to hold for investment. However, a taxpayer who changed his or
her mind after holding the property for investment might well accomplish very
significant tax savings.
A good attorney or accountant may be able to find a safe way to perform an
exchange where, at first glance, one did not appear to be possible. Get sound
advice from a licensed professional!
Rice & Stallknecht, P.C. would be honored to
assist you.
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