There are different tax codes for different forms of property dispositions provided by the IRS. A primary residence is subject to section 121, an investment property is subject to section 1031, and involuntarily converted property is subject to section 1033. Almost every section has both positives and negatives. It is important to consider the possibilities each property may give you when considering selling it.

Through advanced planning, one can typically minimize tax consequences by utilizing one or more tax sections. Due to the fact that circumstances may change over time, the IRS allows property’s character to change. Consequently, an investment property can eventually become a primary residence, a vacation home can also become an investment property, and so on. However, to make this possible, you must follow all the rules and 1033 exchange time frame regulations to make things successful.

Moreover, converting property may require additional rules. Here are some opportunities to consider.

The Exchange Of An Investment Property That May Become A Primary Residence In The Future

This scenario has been specifically addressed by a special rule created by the government. Upon converting a 1031 exchange property to a primary residence, the owner must wait five years before selling and obtaining the Section 121 exclusion. To qualify as a primary residence, the taxpayer still needs to have occupied the residence for at least two of the last five years.

Combining Section 121 And Section 1031, When The Value Of The Property Exceeds The Exclusion

If the gains from the sale of your primary residence exceed the exclusion limits of $250k for an individual or $500k for a married couple, you may wonder what options you have. Home prices were significantly lower in 1997, when section 121 was implemented, and limits that once seemed reasonable are now out of date. An owner can establish the property as an investment by moving out of the primary residence. The investment home can then be sold using section 1031 after a reasonable seasoning period. The government has allowed the application of both tax codes if the sale of investment properties occurs in a time period where section 121 can still be applied. Thus, the residual amount can simply be exchanged under section 1031 in order to take advantage of the exclusion.

Using 1031 Exchange In The Case Of A Involuntary Conversion

You may be able to utilize a 1031 Exchange if the city acquires the property you have held for investment. You can also use Section 1033 if the city acquires the property through an involuntary conversion. Despite Section 1031 offering greater flexibility in like-kind requirements, Section 1033 provides benefits in terms of time requirements and allows sales proceeds to be received.

You should consult appropriate tax counsel prior to disposing of an asset. You can count on us to work with your tax and legal teams.

If you are interested in learning more about the opportunities we may have for you, please contact us.