HOLD IT FOR FIVE AND TAXES MAY DIVE

          The new law, signed October 22, 2004, imposes a five year holding period for 1031 exchange property that has been converted to a primary residence before residential capital gains exclusion can be used.

            Code Section 121 allows an exclusion of $250,000 of capital gain per owner of property that qualifies as the primary residence of the taxpayer.  Assuming that the occupancy requirements are met, a husband and wife could exclude $500,000 of gain on their primary residence every two years.

            Code Section 1031 allows a deferral (a postponement not elimination of capital gains tax).

            Many investors have been converting their former rental property into their primary residence, living there for two years, selling the property, and excluding the gain.

            The new law now requires that any former 1031 exchange property (property that has been acquired in an exchange) must have been held for a period of five years before the residential exclusion tax break can apply.

            Example:  Dave and Sally exchanged into a rental house in September of 2001.  It has been rented for the past three years.  In October of 2004 they move into the house as their primary residence and occupy it for the next two years.   In October of 2006 they sell the house.  Dave and Sally would qualify for the exclusion.

            Why?  Because the property has been held for five years.

            Example:  Dave and Sally exchanged into a rental house in September of 2002.  It has been rented for the past two years.  In October of 2004, they move into the house and occupy it as their primary residence.  They will have to wait until October 2007 to sell the house if they want to qualify for the exclusion.

            Why?  Because the property has to be held for minimum total of five years.

            The other primary residence requirements of Code Section 121 still apply.

            The new law simply creates a situation where you must "hold for five for taxes to dive".