I recently purchased a new home and have started thinking about long-term investment goals including eventually converting my home into a rental property or even keeping it as a second home. There is another tax strategy that I could take advantage of down the road. Today’s Wealth Building Wednesday discusses the principal residence exclusion which allows homeowners to have a gain on the sale of their primary residence.Read More
After using 1031 replacement property for business use or investment, you can convert the property to a personal use property. Generally, under Section 121 of the Internal Revenue Code, if used as a primary residence for at least 24 months within the last five years, one can exclude up to $250,000 in gain ($500,000 if married, filing jointly). Of course, you may not have taken the Section 121 exclusion within the past two years. However, under HR 4520 (The Jobs Act) signed into law on October 22, 2004, by President George W. Bush, properties acquired in a 1031 exchange must be owned for at least five years and used at least 24 months of the last five years before allowed to take the Section 121 exclusion. Under Section 121, regardless of whether or not a 1031 exchange was involved, you cannot exclude depreciation recapture from May 6, 1997 forward so some tax may be due on the sale.