What’s New with the IRS Tax Code and 1031 Exchanges?

Initially created in 1918, the U.S. Tax Code is a complex and ever evolving body of law.  With constant IRS pronouncements and occasional legislative amendments and additions, the Tax Code continues to expand and change with the times. 

Internal Revenue Code §1031 was enacted in an earlier form in 1921.  Slowly gaining in popularity, landmark tax court case Starker v. U.S. this case, for the first time allowed property owners to engage in delayed exchanges by taking up to 180 days to acquire their replacement properties.  Previously, taxpayers were required to swap their properties directly with other taxpayers with no cash changing hands in order to avoid being taxed.

As a direct result of the (Starker) case, the U.S. Treasury Department enacted Treasury Regulations §1.1031(a)-1 through §1.1031(k)-1 in 1991.  These regulations provided taxpayers with a road map in which to navigate the previously murky waters of delayed exchanges. 

Every year, the IRS issues scores of private letter rulings, revenue procedures and other memorandum clarifying its position and providing taxpayers and their advisors with guidance on property exchanges.  In addition, tax courts issue rulings and both state and federal legislatures pass laws concerning tax-deferred exchanges. 

In this evolving environment, Starker Services, Inc. strives to always be informed of the most recent rulings and laws which directly impact §1031 exchanges. 


Vacation Home Safe Harbor

Newly released Revenue Procedure 2008-16 provides a safe harbor for exchanging a vacation home. The IRS has provided guidelines on rental time versus personal use of vacation homes that a taxpayer intends to use as either a Relinquished or Replacement property in a §1031 exchange.

New Prorated Exclusion of Gain of Sale of Primary Residence

A little mentioned provision in the Housing Assistance Tax Act of July 23, 2008 amended the Primary Residence Sale Exclusion Rules. This amendment can substantially change the primary residence exclusion when an investor converts an investment property to personal use.

5-Year Hold Required to Exclude Gain Under IRC 121

On October 4, 2004, President Bush signed into law corporate and foreign tax legislation that also contained a provision affecting IRC §1031. Under this provision, a taxpayer who exchanges under IRC §1031 into a rental house as a replacement property that is later converted into their primary residence, is not allowed to exclude gain under the primary residence exclusion rules of IRC §121 unless the sale occurs at least 5 years from the date of its acquisition. This rule is combined with the New Proration Rule listed above.

Contact Starker Services, Inc. to request a detailed information page on these new rules and guidelines.

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