SELLING A PRINCIPAL RESIDENCE FORMERLY USED FOR INVESTMENT
Internal Revenue Code IRC 121 allows taxpayers selling a principal residence to exclude $250K of gain from taxation (or $500K for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC1031.
While the rules for excluding gain fom taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the 121 capital gains exclusion and the 1031 capital gains deferral. However, Rev.Proc 2005-14 only addressed situations wherein the property being sold is investment property formerly used as a principal residence, it does not address how to apply 121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act, of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of 121. Specically IRC121 has been amended EFFECTIVE JANUARY 1, 2009. again, THE AMENDMENT only AFFECTS TAXPAYERS WHO ARE SELLING A PRINCIPAL RESIDENCE (QUALIFIED USE) WHICH THEY FORMERLY USED FOR INVESTMENT(NON QUALIFIED USE) the central point of the 121 amendment is that these taxpaers are not enitled to the full 121 exclusion because the prior investment use is considered "non qualified" use and any gain allocated to the peiod of non-qualified use may not be excluded under 121.
Compliments of Julie Tumbaga, Orexco 1031 Exchange.
to be continued later.
