IRS Expands 1031 Exchange Eligibility
IRS Revenue Procedure 2005-14 extends the benefits of 1031 exchanging
by allowing homeowners to apply both IRC §121 and IRC §1031
capital gain exclusions to the sale or exchange of a home. To qualify,
taxpayers must comply with all the rules in both sections. If the
property or a portion of the property to be sold has been used
in the taxpayer's trade or business or held for investment within
the guidelines set forth by IRC §1031 as well as a principal
residence as required under §121, the taxpayer can combine
both sections for optimal tax savings and benefits.
There are several cases in which property owners may qualify.
The first instance involves residences that were used as personal
residences and either rented out and held as investment during
different time frames. Properties consisting of separate dwelling
units in which a portion is used as the taxpayer's primary residence
and the remaining units are used as an office or rental units also
qualify. And finally, primary residences that have a business portion
used as an office are eligible for combined §121 and §1031
exclusions. IRC §121 is applied first, then any remaining
gain can qualify for a 1031 exchange. Depreciation taken on a principal
residence is eligible for deferral under IRC §1031.
The IRS provides 6 examples that illustrate the treatment of depreciation
and boot and can be accessed at http://www.irs.gov/irb/2005-07_IRB/ar10.html#d0e1789.
The guidance set forth by the IRS allows for advantageous tax benefits
in the sale of properties that have been used consecutively or
concurrently as a home and a business. To ensure proper application
and receive step-by-step guidance on a successful tax-free exchange,
consult your 1031 Exchange Advantage expert at 866-944-1031 today.
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