No, unfortunately, it is effective for personal residence sales occurring on or after October 22, 2004.
I will try to address each of the other items.
The blinds would typically be personal property. However, if you acquire a property and overhall the entire project, including new blinds, the cost of the blinds should qualify as part of your improvement exchange. It is a gray area and depends on the over all project. The question is whether it is part of a capital improvement or maintenance/repairs.
Items such as prepaid insurance, security deposits, prepaid rents, allocations, prorations, etc., have always caused issues with 1031 exchange transactions. The bottom line is that if you are using 1031 exchange proceeds to pay for something that is not like-kind property, then it would result in boot and probably be taxable. For example, if you are selling a multi-family complex you would typically credit the buyer with your security deposits. In this case, a credit has used part of your 1031 exchange proceeds for something other than purchasing real property and it would create boot.
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 with a 121 Exclusion pursuant to Sections 1031 and 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) 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 it 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.
I can see how the new rules might apply to primary residence sales occurring after 10-22-04, but this might retroactively affect homeowners who had previously converted an investment property to a primary residence after only one or two years of investment use.
If the homeowner previously entered into a contract to sell his primary residence, but the settlement will now occur after 10-22-04, it seems grossly unfair to apply this new rule retroactively.
That is why I am hoping that the rules apply to replacement property acquisitions from 10-22-04, instead of primary residence sales from that date forward.
“The provisions of this new law are effective for personal residence sales occurring on or after October 22, 2004.”
Bill,
Did you really mean to say 1031 exchange replacement property acquisitions occurring after October 22, 2004?
In a separate 1031 exchange issue, I want to use an improvement/construction exchange to order improvements and upgrades to a replacement property I plan to acquire. Part of my “improvements” involve window treatements (really just blinds in all the windows). Will the blinds be considered personal property or can they be included under the improvement umbrella, purchased by my intermediary with exchange funds.
As a follow on, if you say that the blinds are personal property and exchange funds used to purchase them will be considered having constructive receipt, what about the prepaid escrows for insurance and property taxes that are often collected at settlement? Would constructive receipt rules also apply to exchange funds used to pay these closing cost items?
I’m looking to complete settlement on my replacement property on Nov 11, and my only issue for this settlement is the “improvement” question. Because my financing does not require an escrow account, the property tax and hazard insurance question is only for my education, for now.