1031 Exchange/ 500,000 exclusion

[Unregistered]

Hi all,

A person owns rental units. He then does a 1031 exchange on them and purchases a rental home. The person plans on moving into the home at some time in the future to eventually sell it once they have satisfied the 2 out 5 year requirement. Can the individual exclude the deferred gain?

Thank you for your help in advance.

[Bees Knees]

No

TheTaxBook, page 1-11 says the exclusion of gain on the sale of a principal residence does not apply if the principal residence was acquired in a like-kind exchange in which gain was not recognized within the prior five years.

[Unregistered]

Like-Kind Exchange of Personal Residences

One of the most generous income tax breaks allows individuals to exclude from income up to $250,000 of gain ($500,000 in most joint return situations) realized on the sale of a principal residence. You have to own your house for two years and use the property as your principal residence in order to get the full benefit of the exclusion.

Now, if you recieve your home as a result of a like-king exchange, the new law lengthens the period of ownership to five years. This means you must own your home five yers after you received it in the exchange in order for the exclusion of gain rule to apply.

[Gene V]

Question

Do you have to own the property as your personal resident for five years or can you count the number of years the property was use as rental property? Example: you exchange rental property for new rental property in Jan. 2006 then in Jan. 2009; you convert the property to your personal residents. Do you have to live in the house for additional 5 years or just two years?

[Unregistered]

The only difference is that the sale must be 5 years from the date the property is received in the exchange. Everything else is exactly like any other residence.