Tuesday, January 12, 2021 / by Carol Glover
to benefit from available tax tools.
Understanding the interplay of the two tax codes:
Primary Residence-121 Exclusion
The Taxpayer Relief Act of 1997 altered the exemption amounts for capital gains on a personal residence. A homeowner must have lived in the home to be sold for 2 of the last 5 years prior to sale. If this threshold is met, there is a $250,000 exclusion for single individuals and a $500,000 for married couples filing jointly. For many places in the Nation, this exclusion is sufficient to shelter all of the capital gain from the sale of a home. However, in the parts of the nation where properties have benefited from substantial appreciate, this good fortune can be a limitation for those to which to sell and move into a new home as the capital gains reduces their overall net worth.
Investment Property- 1031 Exchange
Section 1031 of IRS (the Internal Revenue Code), generally referred to as the "1031 exchange”, offers owners of income producing properties a way to defer their tax liabilities. Put simply, they can exchange a property that they have held as an investment or rental asset ("relinquished property") for a "like-kind" property held as an investment or rental property ("replacement property”). It allows them to defer or put off their income tax liabilities and Federal and state capital gains in most cases.
It is worth mentioning that you, as a property owner or investor, can only use 1031 exchange if you have held your property for investment or rental or business use. The tax code is not applicable to the property you have held for your personal use. For example, you cannot use your primary residence, vacation property, or second home for this purpose. However, certain exceptions may apply to this condition.
Joining 1031 Exchange and the 121 Exclusion
With proactive and careful tax planning, you can combine the advantages of the 1031 exchange and the 121 exclusion. The result is that you can take the exemption amounts of $250,000/$500,000 and defer the balance of the net equity by investing in another income producing property. A couple of examples of putting this into action would be to sell the residence, invest the $250,000/$500,000 in a new personal residence, perhaps a condo in town or a home on a golf course. The balance of the funds can be rolled forward to the purchase of an income property such as an apartment building or NNN investment. This is just one example. There are multiple ways to prepare to tax advantage of the combination of 121/1031, but after analysis many homeowners realize they are not trapped.Want to see if you may qualify?
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Carol Glover is a licensed Real Estate Attorney and Broker with Engel & Voelkers. Dave Salzman is the Broker of record for Engel & Voelkers LA- Southbay and they work with clients to create long term planning goals for their clients’ real estate portfolios.