Deal of the Month - Prime Example of the Benefits of Planning Ahead

Opportunities & Solutions in Today’s Market

We often get called into a transaction at the eleventh hour to structure exchanges. Last month’s deal is a transaction we were fortunate to get involved with well before the relinquished property went to market.

When section 1034 was replaced with section 121 in 1997, homeowners in general were excited to be given the opportunity of a $250k exclusion individually and $500k as a married couple on gain upon disposition of a primary residence. To qualify a home must be occupied as a primary residence for an aggregate of two out of the preceding five years and the exclusion can be taken once every two years.

The problem with section 121 is that for people with gains in excess of the $250/500k exclusion limits there is no additional relief regardless of what is acquired… In this situation our clients had gains in excess of $2.5M.

The reality was that a sale of the property as their primary residence was going to give the couple a $500k exclusion on a gain of $2.5M netting them a gain of $2M and taxes of more than $500k! This was not acceptable.

Our solution was to take the home off the market and convert it to an investment. Since 1031 contains no required hold period the couple and their tax counsel decided on the appropriate seasoning period to satisfy the “held for investment” requirement.

The property was placed on the market and sold using a 1031 exchange. Since the property still satisfied the two out of the preceding five-year occupancy period of section 121, they received the $500k exclusion at closing and 1031 exchange the balance of the transaction.

The exchange was completed deferring all tax exposure while our clients were still able to take advantage of the residential Universal Exclusion of $500! Revenue Procedure 2005-14 is the IRS’ response to this strategy.

What Are You Selling and What Do You Want It to Be?

The above transaction is a prime example of the benefits of planning ahead. When our clients first contacted us they were planning the sale of their home as their home… By converting the property to an investment they were able to defer all gain where there had been a very large gain and tax exposure. A little information and planning in this case save hundreds of thousands of dollars!

Want more information on this process and Rev. Proc. 2005-14?
Sign up for our upcoming webinar!

What Are You Selling and What Do You Want It to Be? - Course Flyer

This class will cover the basics of 1031 Exchanges and Section 121, the Universal Exclusion for a home sale and how the two can be used independently OR together to make deals happen. Taught by Exchange Facilitator David Moore for 1 Oregon Credit Hour!

  • Section 121 – The Universal Exclusion
  • How to Use The Exclusion
  • IRC Section 1031
  • Exchange Cornerstones
  • The Napkin Test

Can’t make it? You should still register! Everyone who signs up will receive a copy of the slides and a link to view the session again.

Register Now

The sooner you involve the team of professionals at Equity Advantage in your 1031 exchange, the better. They’re seasoned experts who know all the ins and outs of this complicated transaction. Call them at 503-635-1031 and protect your investments!