SB&OH EXCHANGE ACCOMMODATORS, LLC

November 1, 2004

ANNOUNCEMENT

Dear Friends:

On October 22, President Bush signed HR 4520, the corporate tax bill, that includes a provision that restricts certain IRC § 1031 exchanges.  Under this provision, a taxpayer who exchanges under IRC § 1031 into a rental house as a replacement property that is later converted into their primary residence, is not allowed to exclude gain under the principal residence exclusion rules of IRC § 121 unless the sale occurs at least five years from the date of its acquisition.  The Conference Agreement on HR 4520 includes the following provision to amend § 121(d):

SEC 840.  Recognition of gain from the sale of a principal residence acquired in a like-kind exchange within five years of sale. 

(10) PROPERTY ACQUIRED IN LIKE-KIND EXCHANGE. – If a taxpayer acquired 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 the acquisition of such property.

The result of this additional requirement to IRC § 121 is that anyone exchanging into a rental which they subsequently convert to personal use will have to wait at least five years from acquisition before they can sell it as their residence and exclude any gain under IRC § 121(a).

The change to the home seller rules of IRC § 121 became effective for principal residence sales occurring on or after October 22, 2004.  Any taxpayer who previously acquired their current residence through a tax deferred exchange within the past three years will now have to wait at least another two years before selling their home and excluding gain.  This assumes they meet the two out of five year occupancy test.

Example:  A taxpayer sold their rental house two years ago, completed a simultaneous exchange, and moved there last month to occupy it as their principal residence.  Under the new law, they will have to wait three years before selling the property and excluding gain under IRC § 121.

Please call us with any questions at 253-512-1031 or toll free at 866-309-1031.

Sincerely,
Your Friends at SB&OH Exchange Accommodators, LLC