HR3648 reduction in cap gains rentals converted to primary

Tax, SDIRAs & Cost Segregation
18yFollow

HR3648 reduction in cap gains rentals converted to primary

Lynn Z
Member since 2008 · 689 posts · 23 votes

Does anyone understand this new bill which was passed to pay to forgive mortgage debt? Effective after Jan. 2008 for sale of any residence that previously was used as a rental or vacation home. I'd appreciate some feedback on why I now have to live 5 years in my 1031 exchange rather than two out of five years to qualify for the exclusion.

0Reply
6 views

6 Replies

Jump to latestLatest
  • Joe Wilson
    Accountant · Newtown, CT · Member since 2008 · 123 posts · 34 votes
    18y

    I didn't see it in the HR3648. I guess I missed it. Closing that loop doesn't surprise me. You will have to live it longer than expected.

    It makes sense (although the IRS rarely does) that the IRS would want to close the gap of people purchasing rental or vacation homes and in their later years selling their personal residence and getting the exemption and then living in their rental/vacation home and selling it two years later and getting the same exemption again. It really is double dipping on an exemption meant for people to benefit from buying a home.

    I would not be surprised if they excluded all gains from the time it was a rental property in the future. I don't see that happening since they have done this.

    Joe

    0Reply
  • Lynn Z
    OP
    Member since 2008 · 689 posts · 23 votes
    18y

    So I invest in a property for 6 years, pay my mortgage and expenses, roll into a rental for a 1031 5 yr. hold, rent it for a few years and have to reside in it for five years to earn the exemption? Just to help unfortunates that don't want to pay taxes on the forgiven mortgage debt because they couldn't make a few mortgage payments. I'm sorry I just don't agree with Charlie Rangel and the House Ways and Means Committee that messed up a pretty good deal for investors. Bill Clinton actually created this primary residence exemption that could only be exercised every two years.

    Also, they're floating the idea in congress for residence definition to be a five year period. Next they'll telling us where to live.

    0Reply
  • Lynn Z
    OP
    Member since 2008 · 689 posts · 23 votes
    18y

    It appears that the provision was stripped in the Senate finance committee at the last minute and discussion of this in the congressional quarterly on 12-18-07 H16775. HR states the House was taxing the wealthy with vacation homes but glad that the Senate stripped that provision because the income level of sales of second homes the prior year was only only in the $80k's.

    This HR bill was sent over to the Senate twice with this provision and I am so glad the CPA's at my latest Real Estate Investor Club meeting were wrong.
    Believe me I am overjoyed and can look forward to continued rental of my 1031 exchange with relief.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    18y

    Yes, it was quietly stripped out of the bill along with provision that would have eliminated the 1031 exchange of artwork.

    You still have to hold the property for five years and live in it for two years in order to qualify for the 121 exclusion if the property was acquired through a 1031 exchange transaction. This provision was in the October 2004 tax act.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
  • Lynn Z
    OP
    Member since 2008 · 689 posts · 23 votes
    18y

    Sounds like the vacation/second home directive from the IRS establishes what they consider 1031 minimum holding period for a qualifying property rather than holding two years or two tax years etc. etc. Also, I'd be a little afraid to remodel one year, put it in service another year and count that as two years since that court case states holding for investment is not a qualifier.

    Also, with all of the legal paperwork one has to do from the contract on to conduct an exchange you'd think intent to hold would be adequate documentation of that intent.

    Unless I can find a cpa that is really up on these deals I"ve done my last one.

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    18y

    Hi Dal1,

    We had the same thoughts. Revenue Procedure 2008-16 only addresses vacation properties, second homes and essentially primary residences that have been converted to investment property, but we wondered if this might be the IRS's way of starting to go down the two year holding period requirement. However, with so many other rulings from the IRS on 1031 exchanges, they would have included this 24 month holding requirement in more of them if this was theiir position on all investment property. The intent to hold is still the determining factor.

    However, there has been a tremendous amount of abuse in terms of investors completing 1031 exchanges on vacation properties and second homes over the years that really should not have qualified. So, we are taking the position that this new 24 month holding requirement is specifically to curb the abuse in this area.

    I wouldn't put away your 1031 exchange tool just yet! You are more than welcome to call me if you would like to brainstorm any specific 1031 exchange transaction.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free