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Lane
Lane, CFP, MBA, CRPS
Category: Tax
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Experience:  Providing Financial & Tax advice since 1986
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I found some info sec. 105 which says that a rental exchanged

Resolved Question:

I found some info sec. 105 which says that a rental exchanged by 1031, must be held for 5 years, before it can be sold as a residence, in order to exclude the defered gain. And must meet the 2 year ownership & use test.
Is there any other investment, besides exchanging into a real property at
$ 500,000 that could be used as an exchange? client found investment company
that offers some kind of investment that would qualify? Do you know of any?
Thanks again,
Fred
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Sale of residence that was formerly investment
property – the taxpayer is entitled to only a pro-
rated portion of the $250,000/$500,000 exclusion.
• Non-qualified use prior to January 1, 2009 is disre-
garded, except for purposes of meeting the 5 year
rule under HR 4520, if applicable1
• Gain resulting from depreciation is taxed and is
disregarded for purposes of determining the pro-
rated amount of the exclusion

NPVAdvisor :

This is a result of the amendment to rule 121, effective Jan. 1 2009

NPVAdvisor :

Maybe an example will help:

NPVAdvisor :

Taxpayer acquires an investment prop-
erty, rents it for 3 years and then occupies it for 5
years as his principal residence (no use prior to 2009)
before selling it and realizing $350,000 of gain of
which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from
the calculation. The remaining $310,000 is subject to
the prorata calculation as follows:

NPVAdvisor :

3 (years of non-qualified use) = 3 (37.5%) x $310,000=$116,250
8 (years total ownership)
8
Thus $116,250 is not eligible for exclusion and is
taxed at the applicable capital gains rate. $40,000 of
gain is from depreciation and is taxed at the applica-
ble recapture rate. The remaining gain of $193,750
may be excluded from taxation under §121.

NPVAdvisor :

Here's another one:

NPVAdvisor :

Taxpayer acquires an investment prop-
erty in 2007, rents it until 2010, and then occupies it
for three years as his principal residence before sell-
ing it in 2013, realizing $400,000 of gain. The two
years prior to January 1, 2009 are disregarded (but
included for determining the five year period).
1 year non-qualified use
(disregard 2007, 2008) =
6 years of total ownership
1 (16.66%) x $400,000=$66,640
6
Thus, $66,640 is not eligible for exclusion and is
taxed at the applicable capital gains rate. $250,000 of
the remaining gain may be excluded under §121, with
the balance of the gain, $83,360 taxed at the applica-
ble capital gains rate. In sum, $250,000 is not taxed
and $150,000 is taxed.
Taxpayers selling a principal residence after
January 1, 2009, which was formerly used as an
investment/rental property should consult with their
tax or legal advisors regarding the application of the
amendment to §121 to their particular situation.

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3647
Experience: Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.


Thanks Fred,

Let me know if I can help further

Lane

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