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- This topic has 26 replies, 8 voices, and was last updated 17 years, 6 months ago by
SD Realtor.
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June 25, 2007 at 5:03 PM #62004June 25, 2007 at 5:03 PM #62047
scruffydog
ParticipantThanks for your comments…
Owning real estate out of state greatly increases management problems and costs – not an option for me.
To make IRS happy tax accountants usually recommend owners who convert a rental to a principal residence occupy it for at least 1 year to claim the primary residence exclusion. 5 year ownership requirement is probably correct (not an issue for me).
SDR – What are the tax rules for depreciation recapture with a 1031 exchange with a same value property?
June 25, 2007 at 5:46 PM #62024El Jefe
ParticipantI thought you had to OWN the property for 5 years in the case of converting back to rental use. Can you point to the IRS guidance that says you have to OCCUPY it as a personal residence for 5 years. I read Pub 523 for Tax year 2006 and didn’t see the 5-year personal use for the case of converting rental back to residence addressed.
Sorry… checked my notes… the 5 yr holding period only applies if the property was originally acquired through a 1031 exchange… My Bad!
This closed the loophole of 1031’ing a couple of crappy rental houses into a McMansion, moving in for 2 years and taking $500K off the top tax free.
FYI… to Summarize for anyone interested
President Bush signed H.R. 4520 into law on October 22, 2004.
New Holding Period Created
The provisions contained within H.R. 4520 created a five (5) year holding requirement for an Investor (Taxpayer) who wants to exclude capital gains from his taxable income pursuant to a 121 tax-free exclusion from the disposition (sale) of his primary residence that was originally acquired as rental or investment property as part of a prior tax-deferred exchange transaction.
June 25, 2007 at 5:46 PM #62067ParticipantI thought you had to OWN the property for 5 years in the case of converting back to rental use. Can you point to the IRS guidance that says you have to OCCUPY it as a personal residence for 5 years. I read Pub 523 for Tax year 2006 and didn’t see the 5-year personal use for the case of converting rental back to residence addressed.
Sorry… checked my notes… the 5 yr holding period only applies if the property was originally acquired through a 1031 exchange… My Bad!
This closed the loophole of 1031’ing a couple of crappy rental houses into a McMansion, moving in for 2 years and taking $500K off the top tax free.
FYI… to Summarize for anyone interested
President Bush signed H.R. 4520 into law on October 22, 2004.
New Holding Period Created
The provisions contained within H.R. 4520 created a five (5) year holding requirement for an Investor (Taxpayer) who wants to exclude capital gains from his taxable income pursuant to a 121 tax-free exclusion from the disposition (sale) of his primary residence that was originally acquired as rental or investment property as part of a prior tax-deferred exchange transaction.
June 25, 2007 at 6:40 PM #62038(former)FormerSanDiegan
ParticipantEl Jefe -Thanks for clarifying.
June 25, 2007 at 6:40 PM #62081ParticipantEl Jefe -Thanks for clarifying.
June 25, 2007 at 6:45 PM #62040Participantscruffydog –
What is your goal ?
If it is to take your real estate profits to avoid losses, the 2-year personal use might eat up the taxes you seek to avoid.
It might be a wash between paying 25% now in taxes versus taking a 25% loss over the 2 years you need to occupy the rental property. Evaluating this trade requires a crystal ball, however.June 25, 2007 at 6:45 PM #62083Participantscruffydog –
What is your goal ?
If it is to take your real estate profits to avoid losses, the 2-year personal use might eat up the taxes you seek to avoid.
It might be a wash between paying 25% now in taxes versus taking a 25% loss over the 2 years you need to occupy the rental property. Evaluating this trade requires a crystal ball, however.June 25, 2007 at 9:23 PM #62074nhamlin
ParticipantI would encourage you to investigate an installment sale. You can delay a lot of the taxes. You can usually get a slighty lhigher price with owner carryback financing.
I would suggest getting a good downpayment and a substantial prepayment penalty. This will allow you to collect interest on money that would immediately go to the IRS if you did not elect the installment sale.
If you do an installment sale, you must carefully evaluate the buyer. If the buyer has other property, you may cross collaterize to increase your security.
Norman Hamlin
[email protected]June 25, 2007 at 9:23 PM #62117ParticipantI would encourage you to investigate an installment sale. You can delay a lot of the taxes. You can usually get a slighty lhigher price with owner carryback financing.
I would suggest getting a good downpayment and a substantial prepayment penalty. This will allow you to collect interest on money that would immediately go to the IRS if you did not elect the installment sale.
If you do an installment sale, you must carefully evaluate the buyer. If the buyer has other property, you may cross collaterize to increase your security.
Norman Hamlin
[email protected]June 25, 2007 at 9:39 PM #62078SD Realtor
ParticipantScruffy –
El Jefe was 110% correct on the 5 year holding period designated in 2004. So 2 out of those 5 you need to occupy to get the exemption.
So I am an engineer and I am a Realtor. I am not a CPA or an accountant so my first disclaimer is talk to your CPA regarding the tax laws. With that said, the IRS will recapture the depreciation for your property for every year you did not occupy it REGARDLESS of whether you applied a depreciation expense to it or not. So when the 1031 event occurs, you need to adjust your original basis. This will predictably create a larger tax burden for you. Thus, if you bought a 500k property 5 years ago, and now you buy another 500k property it will not be an equal value exchange. The IRS will recapture 5 years worth of depreciation to the first property so you will actually have a deferred tax gain that you will shelter by purchasing the next property.
Again, confirm this with a CPA… confirm this with a CPA… confirm this with a CPA…
Anyways, I think there are good ideas presented here but like I said, I would confer with your financial planner. That is why I am not making any recommendations at all. While some of the ideas may present a better return then others, you may have tradeoffs of how involved you will need to be to get that return that should be considered. So be open minded, measure all the different proposals and bring them up to your planner.
SD Realtor
June 25, 2007 at 9:39 PM #62122ParticipantScruffy –
El Jefe was 110% correct on the 5 year holding period designated in 2004. So 2 out of those 5 you need to occupy to get the exemption.
So I am an engineer and I am a Realtor. I am not a CPA or an accountant so my first disclaimer is talk to your CPA regarding the tax laws. With that said, the IRS will recapture the depreciation for your property for every year you did not occupy it REGARDLESS of whether you applied a depreciation expense to it or not. So when the 1031 event occurs, you need to adjust your original basis. This will predictably create a larger tax burden for you. Thus, if you bought a 500k property 5 years ago, and now you buy another 500k property it will not be an equal value exchange. The IRS will recapture 5 years worth of depreciation to the first property so you will actually have a deferred tax gain that you will shelter by purchasing the next property.
Again, confirm this with a CPA… confirm this with a CPA… confirm this with a CPA…
Anyways, I think there are good ideas presented here but like I said, I would confer with your financial planner. That is why I am not making any recommendations at all. While some of the ideas may present a better return then others, you may have tradeoffs of how involved you will need to be to get that return that should be considered. So be open minded, measure all the different proposals and bring them up to your planner.
SD Realtor
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