Discussion:Sale of Personal Residence acquired by 1031 exchange

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Discussion Forum Index --> Tax Questions --> Sale of Personal Residence acquired by 1031 exchange

Jsmithcpa (talk|edits) said:

9 February 2006
Question. My client acquired her principal residence in May of 2001 by 1031 exchange. If after May 2006 (5 years from acquisition) she sells the property, can she use the exclusion to exclude the gain? IRS Publication 523 says you cannot if:

1)You acquired the home in a 1031 exchange, and 2)You sold the home: 

    a:  After October 22, 2004, AND
    b:  During the 5 year period beginning with the date you acquired the home.

My question is, since she won't be selling the home during the 5 year period beginning with the date you acquired the home, she should then be able to use the exclusion because she doesn't meet all the rules for ineligibility.

Riley2 (talk|edits) said:

9 February 2006
Your understanding is correct.

Sheldon (talk|edits) said:

2 May 2007
Related to this topic, I would like to know if there is any guidelines for the following. After a 1031 like-kind exchange for investment properties, do you need to keep it as an investment property for a certain length of time before converting it to a principal residence and then also wait out the 5 years as mentioned above?

WesR (talk|edits) said:

2 May 2007
Hi most exchange facilitators will tell you to be conservative you should hold the exchanged property as rental for a minimum of 2 years(which the IRS has ruled as ok). If held shorter for the "aggressive" client they explain the "pitfalls" of a negligible rental period under the intent standard, (ie you cannot exchange a rental property with the "intent" to convert to a personal residence) and urge the client to rent the property for at least one season/year. 121(a)(10) notes the 5 year holding period starts with the date of such acquisition (ie the exchange), therefore the rental period would be included within. bye

FTF65 (talk|edits) said:

May 2, 2007
Agree with Wes - here are some cites:
  1. PLR 8429039 - IRS ruled that 2 years "is a sufficient period to ensure that the residence acquired will meet the holding period test prescribed by Sec. 1031."
  2. Wagensen v. Commissioner, 74 TC 653 - favorable tax court ruling where the taxpayer exchanged ranches under § 1031 and nine months later gave the new ranch to his children for their personal use.
  3. Click v. Commissioner, 78 TC 225 - tax court ruled that the requirements of Sec. 1031 had not beeen met and that the taxpayer's intent at the time of the exchange was to make a gift of the properties and not to hold them for investment.
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