28A — March 15 - 28, 2013 — 1031 Exchange — Mid Atlantic Real Estate Journal
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1031 E xchange
By Kim T. Schooley, CPA, CES, 1031 Accommodators, LLC Exit strategies and tax planning of mixed and “dual” use properties
C
ongress and the Inter- nal Revenue Service have offered guidance
taxpayer’s principle residence for at least 2 years during the 5 year period ending on the date of the sale or exchange. The exclusion is limited to the higher of the gain or $250,000 (500,000 for qualifying joint filers). Any depreciation taken on the property(ies) since May 6, 1997 does not qualify for the exclusion The American Jobs Creation Act of 2004, was signed into law on October 22, 2004 by President Bush, it contains a provision that profoundly af- fects code section 1031 and the relation to code section 121. This legislation included the
following provision to amend section 121(d); (10) PROPERTYACQUIRED IN LIKE-KIND EXCHANGE – If a taxpayer acquired a property in an exchange to which section 1031 applied, subsection (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 acquisition of such property. Now, if a taxpayer acquires through an exchange a rental property which is subsequently converted into a primary resi- dence this property does not qualify for section 121 exclu-
sion until the property has been held for at least 5 years and meets the 2 out of 5 year occupancy test. Although this legislation is more restrictive than previous interpretations, it now offers statutory authority for this type of transaction. It was thought by some that this could be ac- complished within as little as three years, however, now we have a quasi safe harbor to these situations. EXAMPLE: John Q. sold a multi-unit rental on May 1, 2003. All requirements of T. Reg 1.1031 were met and the property was replaced property
November 15, 2005 and intends to occupy it as his primary residence. Under the new law, although the 2 year occupancy test is met November 15, 2007, the taxpayer will need to wait till October 15, 2008 for this property to qualify for the sec- tion 121 exclusion. The purpose of Revenue Pro- cedure 2005-14 is to provide guidance on the application of sections 121 and 1031 to a single sale or exchange of property. The scope applies to taxpayers who exchange prop- erty that qualifies for both sec- tions 121 and 1031 in a single transaction. The gain is computed in the following order: 1. Application of the section 121 exclusion before section 1031 is applied. 2. Application of 1031 gain attributable to depreciation taken after May 6. 1997. This does not qualify for section 121 exclusion; however section 1031 may apply to such gain. 3. Boot, Cash, or non-qualifying property is taxable only to the extent it exceeds the section 121 exclusion. This revenue procedure offers several very specific examples of the application of sections 121 and 1031 in various situ- ations beyond the scope of this article. In general the following is a synopsis of the situations specifically addressed in these examples. Example 1- This example shows the application in the case of a taxpayer that acquired a principle residence which is occupied for two years and converted into a rental and sub- sequently sold. The taxpayer qualified for the section 121 ex- clusion and 1031 exchange. The gain is in excess of the exclusion and cash boot is paid. Practical application- Aclient with a primary residence with a gain well in excess of the ex- clusion may wish to convert to rental for a period of time (2-3 years in this example) before selling the property to receive the entire 121 exclusion and also the application of a section 1031 on the remainder. Example 2- This example il- lustrates the situation where a taxpayer acquires a primary residence with an outbuild- ing/guesthouse that is used in a trade or business. This stipu- lates the allocation that is to be made in this situation and what is attributed to section 121 and continued on page 30A
with regard t o s e v e r a l outstanding i s sues and strategies in- volving IRC section 1031 e x c h a n g e s and IRC Sec- tion 121 prin- ciple residence exclusions. Section 121(a) provides that a taxpayer may exclude gain realized on the sale or exchange of a property if the property was owned and used as the Kim T. Schooley
Why 1031 Accommodators, LLC ® ?
1031 Accommodators, LLC® is a full service intermediary with the experience and expertise to facilitate even the most complex exchange transactions. We have assisted investors, like you, to defer hundreds of millions in capital gains. We pride ourselves on our ability to provide a smooth and worry-free exchange so that you may concentrate solely on locating your new property. Our documentation and procedures ensure strict compliance with the IRC Section 1031 regulations. Essentially, we are here to make it easy for you to build wealth and preserve profits.
Our company was established in 1993. We were one of the first exchange companies in the Northeast.
Kim T. Schooley, our Certified Exchange Specialist, has over 20 years of experience in the business. As well as being a former IRS agent, he is a practicing Certified Public Accountant.
For exceptional service, and more information, contact our Exchange Coordinators at (888) 828-1031.
www.1031accommodators.com
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