From: San Jacinto, CA
Dear TaxMama,
Happy New Year!
My friends RAVE about your generous service to
all the perplexed taxpayers!!!
I have a rental house that I will be selling in '05
using a 1031 Exchange to purchase another rental house
which has a somewhat greater value.
I plan on renting the newly acquired property out for
at least 3 years, afterwhich I will be retiring and
would like to move into the property.
Would the IRS be OK with this or would I be in violation
of the 1031 Exchange Rules?
Gratefully,
:-)Beverly
Hi Beverly,
I am SO glad you asked me about this.
If you wait 3 years, you shouldn't have any
problem with the 1031 exchange that you used to get the new property.
Since so many people try to do some variation on this,
IRS finally issued rules about one part of this issue.
The rules they issued relate to selling that house,
once you've converted it to a personal residence.
So, once you've turn it into your home, three years
after you bought it - you will have to live in it, as your
principal residence for at least 5 years to get the
benefit of not paying taxes on the gain when you sell it.
The personal residence exclusion ($250,000
for you, $500,000 for couples) is used for the profit you
make on the sale of this new home, when you sell it.
Remember, the profit will be based on your purchase
cost of the house you exchanged, plus your buying
and selling costs. So, your gain may be more than
you realize.
You'll also end up paying tax on any depreciation you
will have taken while it was a rental property.
But, if you plan to live in it long-term....worry about all
those things later.
Good luck with the exchange - and keep ALL the
escrow closing documents. ALSO, be sure to keep
all the purchase docs (and improvements) on the
house you're trading away.
Is this soooo much more than you wanted to know?
Sorry....each word leads to a new issue.
Best wishes,
Eva Rosenberg, MBA, EA
