Harlan Lunsford wrote:
- quote -

I agree with Harlan: There was a statute change, but I'm
thinking it might be a 2003 law, not 2004, as it was covered
in my CPE in mid-2004. Whether Congress got the idea from a
prior tax case I know not.

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"finniganps" <finniganps[at]gmail.com> wrote:
- quote -

that change in the law is a far cry from the original post.

this is incorrect:

"Property acquired in a 1031 exchange may not be converted
to personal use for at least 5 years after the acquisition.
To do otherwise will require the property to be reported as
if sold, recapturing deferred gain and depreciation in the
year converted. The 1031 exchange backup paperwork will show
the amount of gain deferred and depreciation on the previous
property. The 8824 form is confusing and sparse with
information to do this. My software produces a backup
explanation of the calculations on the 8824. It helps me
check on my input accuracy and understand what is going on
in the transaction."

this is correct:

"Holding period is only one factor. Key issue is "intent"
as stated by Tom Healy. In PLR 8429039 IRS stated that a
min holding prd of 2 yrs would be sufficient.

A more aggressive stance if "intent" was permanent but
conversion held up for only 12 months or more and the 12+
months straddled two tax years those of us who push the
envelope might buy into this strategy.

This info comes from Asset Preservatiion Inc a national 1031
intermediary and was current last Sep." thanks Hugh.

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"...Congress decided they didn't like the idea of homeowners
taking advantage of the exclusion unless the like kind
exchange existed for 5 years as business property."

Not exactly what Congress said; they want the taxpayer to
hold the property five years, but they don't specify how it
must be used during that period. Matter of fact, if the
property is sold at the five year mark, it needs to have
been occupied as "principal residence" for two of the five
years for 121(a) to apply.

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finniganps wrote:

- quote -

I don't think this is the correct interpretation at all. I
see nothing that says the property must be used for business
purposes for 5 years. What I do see is that, once a property
which was acquired in a 1031 exchange is converted to a
principal residence, the taxpayer must live in the property
for 5 years before selling to take advantage of the
$250,000/$500,000 exclusion.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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- quote -

No, what Lo TAx said above, and I quote: "What I have seen
is that the exclusion of otherwise taxable gain [IRC section
121] for selling one's "principal residence" is not
available until five years after its acquisition if the
acquisition was a tax-deferred exchange."

And that was the new law to which I referred above. the
five year rules deals with and governs sec 121 disposals.

- quote -

Now I forget just who said that about hearing at a Spidell
seminar. What is written above seems to say that "at the
time that property is convered less than 5 years. etc. etc.
it is then immediately taxable. I don't think that is right
because no taxable event has transpired until the property
is sold.

ChEAr$,
Harlan Lunsford, EA n LA

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Holding period is only one factor. Key issue is "intent" as
stated by Tom Healy. In PLR 8429039 IRS stated that a min
holding prd of 2 yrs would be sufficient.

A more aggressive stance if "intent" was permanent but
conversion held up for only 12 months or more and the 12+
months straddled two tax years those of us who push the
envelope might buy into this strategy.

This info comes from Asset Preservatiion Inc a national 1031
intermediary and was current last Sep.

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Harlan Lunsford wrote:

- quote -

OK, after Harlen wrote that, I looked it up. Harlen is
correct. This was changed 10/22/04 with the American Jobs
Act. They added a provision to IRC Sec. 121(d) as follows:

121(d)(10) "Property acquired in like-kind exchange.
If a taxpayer acquired property in an exchange to which
section 1031 applied, subsection (a) shall not apply to the
sale or exchange of such property if it occurs during the
5-year period beginning with the date of the acquisition of
such property."

121(a) says: "Exclusion.
Gross income shall not include gain from the sale or
exchange of property if, during the 5-year period ending on
the date of the sale or exchange, such property has been
owned and used by the taxpayer as the taxpayer's principal
residence for periods aggregating 2 years or more."

Congress decided they didn't like the idea of homeowners
taking advantage of the exclusion unless the like kind
exchange existed for 5 years as business property.

Interesting change in the law......

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- quote -

this seems to be at odds with your earlier post that "Phil
and Lo have it nailed down".

are you saying this is correct:

"I got this at a Spidell seminar a couple of years ago. It
was a recent change. We were taught that if property
acquired in a 1031 exchange was converted to personal use
after less than 5 years of business use, the deferred gain
had to be taxed."

I don't think this is at all correct.

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Norma Desmond wrote:
- quote -

It's not a matter of court cases having decided something
that went on before, but because of the new provisions of
law that were passed last fall. Can't remember which of the
two acts it was, but one of them instituted this five year
rule.

ChEAr$,
Harlan Lunsford, EA n LA

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<DORFMONT[at]aol.com> wrote:

- quote -

I seem to recall there was at least one court case where
the facts were a conversion of a 1031 acquired property to
personal use after 5 years of non-personal use. The court
said, in this case, the 1031 was legit. Then, this became
part of the "lore", i.e. that there is a 5 year period
necessary before converting a 1031 acquired property to
personal use.

In fact, there is no such 5 year rule, but a court case or
two that help. And, I doubt those court cases included
facts of an original intention of converting the 1031
acquired property to personal use down the road. But, I
really don't recall.

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"DORFMONT[at]aol.com (Linda Dorfmont)" <DORFMONT[at]aol.com> wrote:

- quote -

What's to explain? There is no guidance that says any such
thing.

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

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I got this at a Spidell seminar a couple of years ago. It
was a recent change. We were taught that if property
acquired in a 1031 exchange was converted to personal use
after less than 5 years of business use, the deferred gain
had to be taxed.

If this is wrong, could you guys explain it to us again the
right way?

Linda Dorfmont E.A., CFP, CSA

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LoTax wrote:
- quote -

Phil and Lo have the situation nailed down I think.

Nowhere, and no how, can IRS ever forbid anyone from
converting any kind of property to another.

Now tax consequences may be different if you do, but the
taxpayer may still do whatever he wants with his property.

As long as he has it, that is, and provided it is not
subject to intimate domain.

You may smile at that, but my term is correct. After a
municipality decides they want your property for a
commercial enterprise and decide to apply the doctrine of
intimate domain, you will finally realize is that what
they've done something TO your "intimate domain",
ifyougetmydrift.

ChEAr$,
Harlan Lunsford, EA n LA

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"Phil Marti" <prm20871[at]verizon.net> wrote:
- quote -

Well, there's nothing at all in 1031 about any kind of five
year requirement for anything.

Stu

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DORFMONT[at]aol.com (Linda Dorfmont) wrote:

- quote -

I've read and read and read - just about everything I can
get my eyes on - but I've not read this interpretation of
the new "not before five years" rule. Not yet, not til
now. What I have seen is that the exclusion of otherwise
taxable gain [IRC section 121] for selling one's "principal
residence" is not available until five years after its
acquisition if the acquisition was a tax-deferred exchange.
I have not seen anywhere that violating the five-year rule
triggers taxable gain on the like-kind exchange.

Where're you getting your stuff, Linda?

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Linda - do you have a citation for the 5 year rule you list
saying the IRS won't let you convert to personal use for at
least 5 years after the 1031 exchange? I hadn't heard that
IRS released a brite line test like that.

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<DORFMONT[at]aol.com> wrote:

- quote -

converted to "mixed" use? I.e., a vacation rental property
that we would not like to use for more than 14 nights a
year, but still rent out the rest of the time. Maybe this is
too obscure a situation to have a rule!

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"DORFMONT[at]aol.com (Linda Dorfmont)" <DORFMONT[at]aol.com> wrote:

- quote -

I'm sorry, since WHEN can you NOT convert a 1031 acquired
property within 5 years?

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

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<DORFMONT[at]aol.com> wrote:

- quote -

Either you're wrong or I'm misinformed.

I'm not playing "gotcha" here, but I'm wondering if a
long-standing unsettled question is now settled or whether
you're confusing the new 5-year requirement for section 121
exclusions on property acquired in a 1031 with a general
standard for continued business use after a 1031 exchange.

--
Phil Marti
Clarksburg, MD

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"Bernard S" <berniesa[at]pacifier.com> wrote:

- quote -

It depends on the amount of time between the 1031 and the
conversion, and the intention of the taxpayer at the time of
the 1031. If the intention all along was to convert to
personal, then the 1031 is void and it is the taxpayer's
responsibility to report it as such. The longer the time
between the two events the more likely it is that the
conversion became intended well after the exchange. If the
property is actually rented out for a period of time, that
helps the taxpayer as well. After 3 years following the due
date of the return, I think the likelihood of an IRS
challenge is minimal.

--
Tom Healy, CPA
Boulder, CO
Web: http://www.tomhealycpa.com

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