By Robert J. Bruss
DEAR BOB: I know you answered a similar question several months ago, but I don’t recall the answer. I own a six-unit apartment building, in which my wife and I have a large profit. If we make an outright sale, we will owe a huge capital gain tax. My wife remembered an item in your column saying we could make a tax-deferred trade of the apartment building for our “ultimate dream home,” and then we could sell the house in a few years to claim $500,000 tax-free profits. Is there a minimum holding time for the house? –Harold J.
DEAR HAROLD: Yes. You first can make an Internal Revenue Code 1031(a)(3) Starker tax-deferred exchange of your apartment building for your dream home.
However, please remember the basic Starker exchange rules:
- You must trade equal or up in both price and equity.
- You can’t take any taxable “boot” such as cash or net mortgage relief out of the trade.
- Sales proceeds from the apartment building must be held by a qualified third-party intermediary accommodator.
- You have only 45 days after the sale to designate the replacement property.
- You must complete the title acquisition within 180 days.
- The house you acquire must be a rental at the time of acquisition.
Second, although there is no official IRS answer, most tax advisers suggest renting the acquired residence at least six to 12 months (to show investment intent) before converting it into your personal residence.
Third, to qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return), you must occupy the principal residence at least 24 of the 60 months before its sale.
Fourth, for residences acquired in an IRC 1031 tax-deferred exchange, effective Oct. 22, 2004, you must hold the principal residence at least 60 months to qualify for the IRC 121 exemptions.
This five-year rule applies only to residences acquired in a tax-deferred exchange. For other principal-residence sales, the minimum holding time is only 24 months (presuming the owner occupied the principal residence for the same period). For full details, please consult your tax adviser.