2008 Amendment to Section 121 may affect 1031 Exchanges into Residential Property

The Housing Assistance Tax Act of 2008 includes a modification to the Section 121 exclusion of gain on the sale of a primary residence.  This modification may affect taxpayers who exchange into a residential property, and then later convert the property to a personal residence, as explained below.  

Under Code Section 121, a taxpayer can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a principal (primary) residence if they have owned and occupied the residence for two years during the five year period preceding the date of sale.  Gain related to depreciation deductions taken on the property since May 6, 1997 is not eligible for exclusion. > Read full analysis

Rev. Proc. 2008-16:  Safe Harbor for Exchanges of Vacation Homes and Conversions to or from Personal Residences

This revenue procedure provides a safe harbor under which the IRS will not challenge whether a dwelling unit qualifies as property held for productive use in a trade or business or for investment under Section 1031.  This revenue procedure follows Moore v. Commissioner, T.C. Memo. 2007-134 (the recent vacation home case) and the Treasury Inspector General for Tax Administration (TIGTA) report “Like-Kind Exchanges Require Oversight to Ensure Taxpayer Compliance”(9/17/07), which called for more IRS guidance on vacation home exchanges.  The safe harbor, while specifically addressing the vacation home issue, also indirectly addresses the issue of converting a principal residence into qualifying relinquished property prior to an exchange, or converting a replacement property into a personal residence after an exchange. It is just a safe harbor. An exchange may still fall outside the parameters and meet the statutory requirements, but you should expect heightened scrutiny in such a case. The safe harbor is effective for exchanges occurring on or after March 10, 2008.

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Private Letter Ruling 200805012: Development Rights are Like-Kind to Real Property.

Taxpayer intends to transfer a fee interest as the relinquished property and acquire development rights, which the taxpayer will use to enhance real property that the taxpayer already owns (the benefited property).  This benefited property lies within a special area of the city and is eligible for use of the development rights, which such development rights will permit the taxpayer (or its lessee) to develop the benefited property with greater floor space.  The ruling examines whether the development rights are like kind to a fee interest, and if it matters that the taxpayer already owns the benefited property. > Read full analysis

May 2007

Tax Court Rules Vacation Home does not Qualify under Section 1031

In Moore v. Commissioner, TC Memo 2007-134, the Tax Court held that a vacation home must be primarily for investment to qualify under IRC §1031. Holding a vacation home in part with an expectation of profit is insufficient to justify the classification as held for investment. The taxpayer never rented or offered to rent out either the old or the new vacation home, never deducted expenses for the homes, and deducted the interest as second home mortgage interest. The taxpayer used the properties for regular vacation retreats.

March 2007

Private Letter Ruling 200712013:  Related Party Acquires Relinquished Property in a Reverse Exchange and Transfers within Two Years.

In this ruling, the Taxpayer and Related Party are related persons within the meaning of §1031(f)(3). Related party wished to acquire Relinquished Property from Taxpayer but did not own like-kind assets that Taxpayer wished to acquire. > Read full analysis

IRS Disaster Tax Relief

Revenue Procedure 2007-56, Section 17, provides an extension to the 45 and 180 day exchange deadlines in certain circumstances, including declared Presidential disasters. The extension is for the longer of the extension date listed in the IRS notice, or 120 days after the applicable exchange deadline. Generally, the taxpayer must be located in one of the designated counties, regardless of where the relinquished property or replacement property is located, or the taxpayer must otherwise have difficulty meeting the exchange deadlines under the conditions in Revenue Procedure 2007-56, Section 17. Also, the relinquished property must have been transferred, or a property must have been acquired by the EAT in a reverse exchange under Revenue Procedure 2000-37, on or before the declared disaster date.

For the most up-to-date information on IRS granted tax relief in disaster situations, please refer to the IRS website > Go