Selling a primary residence converted from a rental property acquired in a 1031 exchange
"On October 22, 2004, President Bush signed tax legislation that
alters the rules regarding exclusion of gain on principal residence
where that principal residence was acquired by the taxpayer in a
Section 1031 like-kind tax-free exchange.
Under this new provision a taxpayer who exchanges under Internal
Revenue Code section 1031 into a rental house as a replacement
property for a previous investor property and later converts it to
his or her primary residence, is not allowed to exclude gain under
the principal residence exclusion rules of Internal Revenue Code
section 121, unless he/she sells the property at least five years
from the date of its acquisition.
The results of this additional requirement to Internal Revenue Code
section 121 is that anyone exchanging into a rental property that
they such subsequently convert to personal use will have to wait at
least five years from the date of acquisition before they can sell it
as their residence and exclude any gain under Internal Revenue Code
section 121.
The change to the home seller rules of Internal Revenue Code section
121 became effective for principal residence sales occurring on or
after October 22, 2004. Any taxpayer who previously acquired their
current residence through a tax-deferred exchange within the past
three years will now have to wait at least another two years before
selling their home and excluding any gain, provided they meet the two
out of the five-year occupancy test for living in the property.
And yes, the relaxation of the definition of 2 year occupancy to accommodate changes of circumstances predated this change."
James Jay Simpson, Esq.
Attorney: LAW OFFICES OF JAMES J. SIMPSON