1031 Is The IRS Code Section That Covers Non-Taxable Exchanges, Also Known As Starker Exchanges
There is one section that rental property owners should understand.
Our Taxpayer’s Situation:
The couple has a long term rental in which they have lots of equity. They discussed moving into it and making it their home, but it is a rental, and does not meet their standards. So, they do a simple 1031 Exchange of their rental for a much nicer rental that they would use as a home.
The Rules Were Followed:
The proceeds of the sale were given to a qualified intermediary (accommodator), they identified their new property within the required 45 days and closed the sale within 180 days. Now, how long must they wait to turn their “rental property” into their home?
There is no hard and fast rule. IRS looks to the intent of the taxpayer when the first property was sold and then exchanged. Some advisers say, “Wait a year as this would result in showing the property as an investment property for two years” on Tax returns. There is also a Private Letter Ruling (8429039) that stated that a minimum of two years was sufficient.
Some Exchangers Were Acquiring The New Property
Moving in within a short time, and when two years had passed, selling the property under the Section 121 Regulation allowing a $250K/$500K Capital Gain Exclusion. For sales after October 22, 2004, IRS changed the rules. Now, if you acquire a personal residence via 1031 Exchange, you cannot sell and use the Section 121 Exclusion until five years have passed from the date of the Exchange. The tax advisers keep thinking up ideas, and IRS keeps reacting to them.