The ol’ 1031 Five-Year Switcheroo

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So here I am, working on doing my own person 1031 Exchange. I’ve done plenty of deals where either the buyer or the seller was doing a 1031 exchange, but I had never done one myself personally. I have a property where I’ve enjoyed quite a bit of appreciation since I bought it, but I wasn’t looking forward to paying the big fat capital gains tax. So, I planned on doing what any self-respecting person in my position would: I figured I would buy an investment property here in town, hold onto it for a year or two, and then move into it. The property would then become my primary residence, which I could sell two years after that, and keep all of the gain, tax free!

A brilliant idea – one that many people have had in the past. Too many people, as it turns out. I paid a trip to my brand new accountant today, and ran my idea by him. He poured a liberal dose of cold water on my scheme. It turns out that our fearless leaders in the U.S. Guv’mint plugged that little loophole, to wit:

Five (5) Year Holding Requirement for 121 Exclusion

Thanks to recent legislation (passed October 22, 2004), folks like myself will now have to hold the property for a total of five years from the date of purchase in order to qualify for the 121 Exclusion (whereby an owner can sell the property and keep any profits, tax free, up to $250,000 for an individual or $500,000 for a married couple).

Well, that’s not so bad, really. Actually, my new $230/hour accountant told me that I’d have to hold it for five years after I converted it to my primary residence, and he appears to be wrong about that. It’s something that I will want to double-check with him. But a five year hold time isn’t so terrible – I was thinking it would have had to be at least 3-4 years anyway. It’ll just mean I’ll have to wait out an extra year of value appreciation before I cash out. 🙂

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