<snipped by moderator and soon to be closed if sarcasm continues
Well Drew, while your assessment of why the law was enacted
is probably on the money, I would point out that in THIS
case it would apply. The reason it's an issue is because of
specific dollar amounts involved. For the benefit of
excluding $200k in cash out on a possible 1031 exchange,
this person would be forgoing the possibility of excluding
$500k on ANY residence for two years and for FIVE years on
the specific acquired property, if it were considered a
principal residence at some point in the future. Maybe I'm
being too conservative but that's too far off in the future
for my tastes to be predicting the best possible result.

You are also dead on with your analysis of the non-tax
issues, something I was reluctant to bring up because those
are the types of issues you can only assess with a client
you know, and not something you're generally going to start
bringing up in a forum like this. Answering questions based
on facts given is one thing, starting to lay out a road map
is something else entirely.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:
- quote -

Please note that I retracted my statement about 121(d)(10)
in another post. I discuss it further at the end of this
post.

I think you have misunderstood my position.

Lets look at an example.

Facts:

Bought house in 1-2002 for $300,000.
Lived in as principal residence since then to this date.
House currently worth $1,000,000.
MFJ both spouses meet the 2 of 5 years rule.
No prior depreciation.
Assume no mortgage.

OP proposal: Sell house and take original basis plus the
$500,000 exclusion in cash and "exchange" the remaining
$200,000 of proceeds into another property that will not be
his principal residence.

I think we all agree that this won't work. The $200,000
gain in excess of $500,000 is taxable.

What I believe LoTax is proposing is that the OP move out of
the house and turn it into a rental property for some time
period that lasts less than 3 years. Then exchange rental
for a new rental. Claim the $500,000 exclusion and defer
the rest of the gain into the new rental property. LoTax is
not talking about taking the exclusion at some later date
but at the same time as the exchange occurs. So the
exchange would look something like this:

Exchange occurs 1-2006 when old property is worth
$1,200,000.

FMV of new property $1,300,000

Cost of old property 300,000
Accum. Depr. (made up) 8,000
------------
Basis 292,000

Realized gain 1,008,000
Less: exclusion 500.000
------------
Adj. realized gain 508,000

Basis of new property:

Old basis 292,000
Cash to even up values 100,000
Gain excluded 500,000
------------
basis new property 892,000

I agree this works however I think it fails to achieve the
OP's goal in several ways. 1) While the property is a
rental OP has to find somewhere else to live. Hopefully he
has excess cash he can use to buy another home to live in.
2) When the exchange occurs the OP cannot get cash out
without it being treated as taxable boot.

------

I don't know if I read 121(d)(10) the same way you do. I do
not think Congress was specifically worried about this
situation. What I believe (and CCH agrees) is that Congress
was afraid that people would take an existing rental
property, exchange it for another rental property, then at
some future date convert it into a principal residence for 2
years and exclude all the gain. Now the owner has to wait 5
years after the exchange in addition to all the other 121
rules in order to exclude the gain (up to the limits in
121).

So I exchange rental A for Rental B in 11-04 then move into
Rental B in 12-05. I cannot take the exclusion on B until
11-09 while under prior law I could have taken the exclusion
in 12-07.

--
Drew Edmundson

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"Why the schlep?" is a wonderful yiddish expression.

In the case at hand, why all these machinations to avoid the
capital gains tax on maybe $200,000?

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Drew Edmundson <drewsbeagles[at]hotmail.com> wrote:
- quote -

After further reading on 121(d)(10) I believe it is, as
LoTax says elsewhere, immaterial to this discussion.

--
Drew Edmundson

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"Lynn Guini" <nonono[at]nn.com> wrote:

Snip

- quote -

The property. As it currently is.

- quote -

Do you have problems reading what I said? I thought it
quite clear. The principal residence becomes a rental, is
exchanged, and at some point afterwards the acquired
property becomes a principal residence. QUITE clear. How
ELSE did you think 121(d)(10) applies???

- quote -

Based on facts you don't have. So far, all you've done is
state how wrong people are, yet provide nothing to support
your assertions.

David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"LoTax" <lotax[at]hotmail.com> wrote:
- quote -

"LoTax", in about five posts now, I've pointed out what needs to be done.

Your solution requires that the owner wait 2 1/2 years to
make the exchange. It assumes that boot will be received
(not to mention desired in the first place). In addition,
money is going to be needed for an additional residence in
the interim. Should we assume this person can afford it or
that the now rental property will be cash flow positive or
at least neutral?

Of course if you merely want to discuss the original posters
property AS IS and why it can't be done AS IS, tell me where
I am wrong.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Drew Edmundson" <drewsbeagles[at]hotmail.com> wrote:
- quote -

Sure, if you want to wait five years after the exchange and
making the property qualify for the exchange.....

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Beach Exec" <BeachExec[at]beachbums.com> writes:

- quote -

Steve, this is a professional tax forum and the unprofessional
bickering you have read in response to your very reasonable
question is a rarity here. If it continues, I will just start
deleting submissions.

Take a look at what the house cost you. It's the $500,000
above your cost that is tax free. So you are not looking at
paying taxes on another $500,000. Just $1 million less your
cost less $500,000.

Real Estate brokers are not known for business acumen or for
problem solving skills in either taxation or trusts. What
they are known for is inducing people into buying/selling
homes so that they earn commissions. This suggestion of
putting it into a trust to defer taxes is "outright stupid."
That is my professional opinion and you may associate my
name with it.

My suggestion to you is to find a local tax professional.
With the wind fall profit you're looking at, you need to
protect yourself by doing it by the numbers. Make a
mistake and the interest and penalties will be greater
than you want to discuss.

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BeachExec[at]beachbums.com says...

- quote -

Yes, if you use a charitable trust. The downside is that you
would be essentially giving the house to your designated
charity.

Gary

--
You can probably X figure out X which letters to X delete to derive my
email address X.

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"LoTax" <lotax[at]hotmail.com> wrote:
- quote -

I STRONGLY suggest you reread the posters question and the
facts he gave.

Fact: He built his principal residence and has resided
there. As of right now, it is personal use property.

Fact: He asked if he can do a 1031 exchange for the gain
beyond what is allowed under the 121 exclusion.

Fact: No he cannot. A 1031 exchange is not allowed for
personal use property. If he converts to a rental property
then he cannot do a 121 exclusion when doing a 1031 exchange
if for no other reason than a 1031 transaction is
non-recognition of gain. 1031 is not optional. If at some
point after the 1031 he converts the acquired property back
into a principal residence, he must wait five years after
the 1031 before a 121 exclusion is even allowed.

Therefore, no my explanation of the 121 change is NOT
irrelevant, it simply enhances my explanation of answer NO.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:

- quote -

Let's say that OP has lived in his home for three years
(which will satisfy the requirements of section 121) and
that he then rents it out for two and a half years (making
it eligible for section 1031) and then he exchanges it for
another rental property (in an exchange that satisfies the
requirements of section 1031) plus $200,000 cash.

It seems to me, but what would I know, that this exchange
will qualify for both section 121 and section 1031.

The answer to the OP's original question is "yes".

Please tell me where this doesn't work for you, David.
Thank you.

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- quote -

when planning, you can legitimately create some facts to
work to your benefit.

- quote -

yes, he sure did.

- quote -

I agree.

- quote -

"as it currently is". I don't understand what you mean here.

- quote -

121 (d) 10 is law. But your interpretation is incorrect.
Why do you treat the conversion of a principal residence
into a rental as an "acquistion of a principal residence by
exchange under 1031"? That is simply not the case.

- quote -

Proper tax planning will make sure one meets the smell test.

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- quote -

If it's an irrevocable trust with charitable beneficiaries,
I believe it is possible.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: tom[at]tomhealycpa.com, since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

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Lotax[at]hotmail.com (LoTax) wrote:
- quote -

I think I read BeachExec's question a little differently
than you have but perhaps not. I see BeachExec asking if he
can get cash out of the deal if he exchanges the property
for another and pay no tax on the cash. I don't think he
can. But I do agree he can take the 121 exclusion (assuming
all other rules are met) and do a like kind exchange. This
seems perfectly clear by the addition of 121(d)(10) by the
American Jobs Creation Act of 2004.

--
Drew Edmundson

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It's hard to believe, but we are definitely looking at a
total gain of $1M on this beach house if we sell it this
Spring! What we are wanting to do is sell it and take about
half of it to buy another primary residence (another high
appreciation property to live in for another two years)--and
take the other half to buy a business (with real estate).

We have received mixed advice on how to defer taxes on the
remaining gain after the section 121 is taken. Is the tax
on this gain going to be 20 percent? Hopefully, Lo Tax will
share his knowledge in this regard!

One real estate broker told us that the best route is to put
the beach house in a trust, have the trust sell it, then
have the trust buy the respective properties.

Steve
BeachExec AT hotmail.com

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"LoTax" <lotax[at]hotmail.com> wrote:
- quote -

I'm with you, LoTax. Good call. and yes, there are plenty
of wrong answers in MTM, but sometimes you learn things.
Thanks much. (I do often wonder how many non-tax people
come away from MTM with bad "advise" they rely on. Oh well,
you get what you pay for).

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"Lynn Guini" <Lynn[at]nospan.com> wrote:
- quote -

Which is irrelevant if you don't have the facts and law to
BACK IT UP.

- quote -

I suggest you reread the thread from the start before you
add your 2¢. It was stated by the original poster that he
BUILT THE HOME AS HIS PRIMARY RESIDENCE.

- quote -

Snide remarks won't help your argument. For those of who
keep up with tax law changes, this cannot be done. There is
nothing here to suggest this was anything OTHER than a
principal residence built from scratch by the owner. Based
on that as it currently is, it cannot be used in a §1031
exchange but the §121 exclusion CAN be used.

If you turn it into a rental property and THEN do the
exchange, you cannot use the §121 exclusion on the new
property for at least five years. §121 (d) 10. THIS IS
LAW. It ALSO means that by year five, you need to
requalify the the property as a principal residence for two
of the last five years so at the EARLIEST, at year five, you
must have started to live there at year THREE to take the
exclusion as early as possible. Let's not forget that as it
stands now, capital gains go back to 20% in 2009, which not
so coincidentally, is five years from now.

Finally, one should consider intent here. If you counsel
the taxpayer to quickly move in to an exchanged property,
you run a good risk of disqualifying the exchange to begin
with. The smell test would certainly fail if you convert a
primary residence to rental, make the exchange, and then
quickly move into the new property.

- quote -

I agree. Lets stick to the law.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:
- quote -

You're absolutely right, the answer will always be "no" if
you do the transaction wrong, so that it doesn't satisfy the
conditions under which the answer would be "yes". Uh...

I believe the OP's question was phrased "...is it *possible*
to take a 1031 exchange for the amount of the gain over the
$500k exemption for couples?" and I believe the correct
answer was, and still is, "yes". Ask politely, and I'll
explain the circumstances under which the answer is "yes".

- quote -

Uh, you wanna talk about "facts not given nor necessarily
true"? It seems the OP is proposing to trade his home for a
rental property and some cash, and as I see it, your
explanation of the recent change in §121 is simply
irrelevant to his circumstances, leaving the answer to his
original question, still, "yes".

"Those who say "no way," just haven't thought carefully
about it yet..."

LoTax

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:
- quote -

It is called tax PLANNING.

- quote -

Talk about facts given or not necessarily true. Did he
acquire this principal residence in a 1031 exchange? Time
to wipe off your crystal ball and try again.

================================================== ==========
Moderator:
The tone of this thread had better cool down or it gets
closed.
================================================== ==========

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"LoTax" <lotax[at]hotmail.com> wrote:
- quote -

Yours is the only wrong one so far, my citation was in
another post.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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