Posted by JohnBoy on February 20, 2005 at 10:46:36:
I guess you did. I didn’t remember the first post since reading it and didn’t read again until now. So you will have to own it for 5 years and live in it for at least 2 of those 5 years to take the exemption.
converting rental into primary residence - Posted by Ken
Posted by Ken on February 18, 2005 at 08:56:46:
I exchanged some units into a single family residence in December 03. I have the house leased until October this year. I plan on converting the house to my residence in November this year.
Under the new law that took effect October 22, 2004, can I move in this year and sell it say, January 1, 2008 and avoid capital gains taxes on the first 500K.
Or, do I have to actually live in the property for 5 years as my primary residence, which would require I hold the property until December 1, 2010.
Can someone give me the correct interpretation of the law.
Thanks in advance.
Re: converting rental into primary residence - Posted by JohnBoy
Posted by JohnBoy on February 18, 2005 at 12:26:05:
You need to live in it two out of the last 5 years. So if you move in and live in it for two years you can sell it. You get up to $500k if married filing jointly. Otherwise it’s $250k if single.
Re: converting rental into primary residence - Posted by Ken
Posted by Ken on February 18, 2005 at 15:00:26:
Thats how the old law was applied. However, the new law that took effect October 22, 2004 changes the rules.
I was looking for an interpretation of the new rules. They state that you must own the acquired property for a minimum of 5 years, but it isn’t clear to me if you have to rent it for maybe 1 tax year and then live in it for a 5 year period, or just merely own it for that long and live in it for 2 of the 5 years.
Under the old law you would not necessarily have to own it for 5 years, just rent it for maybe 1 tax year and live in it for 2 years out of the last 5 and you were good to go.
Re: converting rental into primary residence - Posted by JohnBoy
Posted by JohnBoy on February 19, 2005 at 18:58:35:
The new law you are referring to has to do with property you acquired through a 1031 exchange. It doesn’t apply to property you purchased outright.
If you acquire a property through a 1031 exchange where you intend to occupy it as a primary residence and take the exemption, then you must own it for a period of 5 years, and you must have lived in it for 2 years out of the 5 years you owned it.
If you just purchased the property where it did not involve a 1031 exchange, then the old rules are the same. You only need to live in it for 2 out of the last 5 years and only need to own it for 2 years.
Here is an article explaining it:
New Legislation Requires 5-Year Holding Period for Principal Residences Acquired Through a §1031 Exchange
On October 22, 2004, President Bush signed H.R.4520, limiting the application of the IRC §121 principal residence tax exclusion. The new law affects any property that a taxpayer acquires through a §1031 exchange and later converts into his or her own principal residence. The relevant portion of the legislation reads:
If a taxpayer acquired property in an exchange to which §1031 applied, §121(a) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.
IRC §1031 applies to investment properties and allows taxpayers to defer the payment of capital gains tax when one or more investment properties are exchanged for like-kind property. IRC §121 applies to principal residences and allows taxpayers to exclude taxable gain on the sale of a principal residence that they have occupied for at least two of the five years preceding the sale of that residence (the amount of the exclusion is $250,000 for an individual and $500,000 for a married couple).
H.R.4520 effectively creates a second condition for the successful application of IRC §121 for taxpayers who sell property that was acquired through a §1031 exchange and subsequently converted into their principal residence. In addition to the requirement that they must have held the property as a principal residence for two of the five years prior to the sale, such taxpayers must also have held the property for more than five years total (either as an investment or a principal residence) since the original acquisition.
H.R.4520 affects IRC §121 for properties that are acquired through §1031 exchanges, but does not change §1031 law. Therefore, when acquiring property through a §1031 exchange, a taxpayer still must intend to hold that property as an investment. Those completing §1031 exchanges cannot acquire a replacement property with the intent to convert that property into a principal residence.
Example:
A taxpayer acquires a property through a §1031 exchange. She holds the property as an investment for 2 years then converts it into her principal residence. She occupies the property for 2 years (she has now held the property a total of 4 years). Although she has held the property as her principal residence for at least 2 years, she does not yet qualify for §121 exclusion because she acquired the property through a §1031 exchange and has only held that property for a total of 4 years. This taxpayer must hold the property for another year in order to qualify for her §121 exclusion.
Re: converting rental into primary residence - Posted by Ken
Posted by Ken on February 20, 2005 at 07:17:13:
Thank you. Thats exactly what I was looking for.
I thought I made it clear in my original post that I acquired the property in a 1031 exchange.
Thanks again