The New 1031 Exchange Rules

One of the most popular "tax deferring" strategies for home owners who are selling one property and acquiring another is the use of Section 1031 of the Internal Revenue Code. It is an effective way to defer paying income tax on capital gain generated by the sale of a property when you plan to reinvest the proceeds in a similar, like-kind asset. Almost any kind of real property is considered "like-kind" with any other real property.

A recently enacted law closes a loophole in the Section 1031 rules, although technically this is not a loophole but rather an unintended consequence of prior tax legislation. In some cases, owners of investment real estate have used the 1031 Exchange rule to swap their investment property for real estate that could be readily converted to an owner-occupied residential property. After the exchange, they turned the property into their principal residence, lived in it for a couple of years, and then sold it. Since then, the new American Job Creation Act of 2004 has ruled that properties converted from a 1031 exchange property into a residence must be owned and used as a principal residence for at least five years to qualify for the tax exemption. Otherwise, the basic tax-deferring benefits of 1031 exchanges continue the same as before.

Please consult your tax advisor for more detailed information.  Also, you can ask Tom for referral to an independent tax advisor as well.

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