President Signs New Tax Law
11/19/04

The new tax law, signed by President Bush on October 22, 2004, will amend the current capital gains law as it pertains to 1031 exchanges. Under the new law, a property that is acquired through a 1031 exchange and then converted to a principal residence must be held for five-years to qualify for the capital gains exemption.

An example would be if a property owner completed a 1031 exchange and the property acquired was a single-family home they planned to rent. The property owners might rent the home for two-years; and then decide to move into it and make it their primary residence for two-years; they then might decide to rent it out for one more year, in which they would qualify for the capital gains exclusion. The reason they should qualify is because they lived in the property for two of the last five-years (which is a requirement to qualify for the principal residence capital gains tax exclusion), and the property was held for five-years after its date of acquisition from the 1031 exchange.

The new law pertains only to properties acquired through 1031 exchanges that are converted to principal residences, and not to properties bought as a principal residence.

The above is for information only, and is not intended to be used as tax advice. Please contact your CPA or tax attorney for questions on how the above information may pertain to you.

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