Housing Assistance Tax Act of 2008 Affects §1031 Exchange Strategies
Amy Gustin, CES® and Vice President of 1031 Exchange Coordinators can be reached at amy@1031eci.com
Investors or owners of second homes may have to change their strategic plans subsequent to President Bush signing the 2008 Housing and Economic Recovery Act (HERA), H.R. 3221 on July 30, 2008.
Under the new amendments, periods of nonqualified use will not be eligible for the exclusion of gain. Any property that had been acquired as a second home, investment property or in a 1031 exchange as replacement property and subsequently converted, and maintained as a primary residence for a minimum or two-years and then sold as a primary residence would only qualify for a pro rata share of the exclusion.
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"Any property that had been acquired as a second home, investment property or in a 1031 exchange and subsequently converted...would only qualify for a pro rata share of the exclusion on gain." |
We've probably all heard some of the positive real estate benefits that have come from the new 2008 Housing and Economic Recovery Act (HERA), H.R. 3221 which included $16 billion in tax incentive to help with today's turbulent real estate and mortgage markets. What many don't realize is that under the pay-go system, the $16 billion has to come from somewhere...
For the most part these tax-incentives were paid for by credit card companies and multi-nationals but a small portion of the bill altered §121 which pertains to the capital gains exclusions of $250,000 / $500,000.
Example 1: Fred and Ginger acquired a "really cool" rental home in Scottsdale in 2008 as part of a 1031 exchange. They rent it out for 3 years and eventually, (in 2011) Fred and Ginger move to Arizona and convert rental home to their primary residence. In 2013 Fred and Ginger decide that the heat is too much and decide to return to the Pacific Northwest. Upon sale, Fred and Ginger are only eligible to exclude 3/6 of the gain up to the maximum amount of the exclusion ($250,000 / $500,000).
The new act becomes effective January 1, 2009 and applies not only to investment properties but to second homes as well.
Example 2: Barney and Betty, a married couple and joint filers purchased their rental home in 1990 as part of a 1031 exchange in which they deferred $385,000 of gain. They planned to retire in 2012 and move into the rental home. They want to live there for 2 years and then sell taking the exclusion of $500,000 and paying 15% on the remaining gain (if any). Under the new regulations, Barney and Betty will only be eligible to exclude 2/6 of the gain because they only lived in the home for 2 of the 6 years they owned it post January 1, 2009.
The act does not affect homeowners who have gain in excess of the §121 limits and plan to convert their primary residence to a rental two years prior to sale in order to take the §121 exclusions as well as 1031 Exchange the remaining gain. Periods of non-primary residence use "which is after the last date that such property is used as the principal residence" is not included in the definition of nonqualified use.
Investors who need additional help applying the new regulations to their individual exchange strategies should contact their 1031 Exchange Coordinator or tax planner for assistance.
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