Disposition of Family Residence and Rental Mixed Use

One of the more attractive provisions under the Internal Revenue Code (“IRC”) permits the gain from the sale or exchange of property to be excluded from income if, during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his or her principal residence for periods aggregating two years or more.   What happens if a taxpayer also uses a property both as a residence part of the time and also rents it out?  Can this property be sold completely tax free?  In a recent article entitled Tax Planning and the Family Residence: Part Two By Michael Schlesinger, Ll.M answers the above questions.

As a general rule, personal residences cannot be swapped tax-free under Section 1031 . However, vacation homes can be swapped if certain conditions are met. Rev. Proc. 2008-16 sets forth a safe harbor for the tax-free swap. The IRS issued this safe harbor because it realized that “many taxpayers hold dwelling units [including vacation homes] primarily for the production of current rental income, but also use the properties occasionally for personal purposes.” Rev. Proc. 2008-16 , section 3.02 states that the safe harbor will apply to any dwelling unit, which is “real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities.” To be eligible for a Section 1031 swap, the property has to meet certain conditions, namely, the ones prescribed in Rev. Proc. 2008-16.

(1)(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately before the exchange (the “qualifying use period”); and

(1)(b) Within the qualifying use period, in each of the two 12-month periods immediately preceding the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

For this purpose, the first 12-month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day) and the second 12-month period ends on the day before the first 12-month period begins (and begins 12 months prior to that day).

(2) Replacement property. A dwelling unit that a taxpayer intends to be replacement property in a §1031 exchange qualifies as property held for productive use in a trade or business or for investment if:

(a) The dwelling unit is owned by the taxpayer for at least 24 months immediately after the exchange (the “qualifying use period”); and

(b) Within the qualifying use period, in each of the two 12-month periods immediately after the exchange,

(i) The taxpayer rents the dwelling unit to another person or persons at a fair rental for 14 days or more, and

(ii) The period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

IRS Examples  Rev. Proc. 2005-14 offers six examples of how Sections 1031 and 121 interact. The six examples have different factual situation and use of a family residence.  I will set forth two examples.

Example 1. Alvin, a single individual, purchased a house for $210,000 in 2000. From 2000 to 2004, Alvin uses the house as his principal residence. From 2004 until 2006, Alvin rents the house to tenants and claims depreciation deductions of $20,000. In 2006, Alvin exchanges the house for $10,000 and a townhouse with a FMV of $460,000 that he intends to rent to tenants. As a result, Alvin realizes $280,000 of gain on the exchange. This is the sum of $460,000 (townhouse’s FMV) plus $10,000 (cash received), less his $190,000 basis ($210,000 cost less $20,000 depreciation) in the house relinquished in the exchange.

Alvin’s exchange of a principal residence that he rented for less than three years (and used as his principal residence for over two years) for a townhouse intended for rental and cash satisfies the requirements of both Sections 121 and 1031 . Section 121 does not require the property to be the taxpayer’s principal residence on the sale or exchange date. Alvin’s ownership and use of the

house as his principal residence for at least two years during the five-year period prior to the exchange is sufficient to qualify for Section 121 gain exclusion. Further, because the house was investment property at the time of the exchange, Alvin may defer gain under Section 1031 .

Accordingly, Alvin first applies Section 121 to exclude $250,000 of the $280,000 gain. Then he applies the Section 1031 nonrecognition rules to defer the remaining gain of $30,000-which includes the $20,000 gain attributable to depreciation. Alvin is not taxed on the $10,000 of cash (i.e., boot) he received in the exchange. Boot is taken into account for Section 1031(b) purposes only to the extent that the boot exceeds the excluded gain. Here, the $250,000 exclusion is more than sufficient to shelter the $10,000 of boot that Alvin received. Alvin’s basis in the replacement property is $430,000. This is the basis of the relinquished property at the time of the exchange ($190,000), increased by the gain excluded under Section 121 ($250,000), and reduced by the cash Alvin received ($10,000).

Example 2, Betty, a single individual, buys a property for $210,000. The property consists of two separate dwelling units, a house and a guesthouse. From 2001 until 2006, Betty uses the house as her principal residence. She uses the guesthouse as an office in her business. Based on the square footage of the respective parts of the property, Betty allocates 2/3 of the basis of the property to the house (i.e., $140,000) and 1/3 to the guesthouse (i.e., $70,000).

In 2006, Betty exchanges the entire property for a residence and a separate property that she intends to use as an office. The total FMV of Betty’s replacement properties is $360,000. The FMV of the replacement residence is $240,000; the FMV of the replacement business property is $120,000, which is the same as the FMV of the relinquished business property. From 2001 to 2006, Betty claimed depreciation deductions of $30,000 for business use. Thus, she realized $180,000 of gain on the exchange. This is the $360,000 aggregate value of the properties she received in the exchange, less her $180,000 ($210,000 cost, reduced by $30,000 of depreciation deductions) basis in the relinquished property.

Under Section 121 , Betty may exclude gain of $100,000 allocable to the residential portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of $210,000 basis, or $140,000) because she meets the Section 121 ownership and use requirements for the portion of the property used as her principal residence. Because the guesthouse is business property separate from the dwelling unit, and Betty has not met the Section 121 use requirements for the guesthouse, she may not exclude the gain allocable to the guesthouse under Reg. 1.121-1(e) . The FMV of the replacement business property, however, equals the FMV of the relinquished business property, and Betty receives no boot. Consequently, Betty may defer the remaining gain of $80,000 under Section 1031 . This gain is calculated as 1/3 of the $360,000 amount realized, or $120,000, minus her $40,000 adjusted basis (which is 1/3 of the $210,000 basis, or $70,000, adjusted by $30,000 of depreciation).

No portion of the gain attributable to the relinquished business property is excluded under Section 121 , Betty receives no boot, and she recognizes no gain or loss in the exchange. Thus, her basis in the replacement business property equals her basis in the relinquished business property at the time of the exchange ($40,000). Betty’s basis in the replacement residential property is the FMV of the replacement residential property at the time of the exchange ($240,000).

Conclusion.  With proper planning you are able to dispose of a mix use property so long as you understand the complexities explained in the six examples mention in this article.

Categories
121 Comments
  1. I do accept as true withagree withbelieveconsidertrust all theall of the ideasconceptsideas you haveyou’ve presentedintroducedoffered for youron yourin yourto your post. They areThey’re veryreally convincing and willand can definitelycertainly work. StillNonetheless, the posts are toovery briefquickshort for newbiesbeginnersnovicesstarters. May justMayCould you please extendprolonglengthen them a bita little from nextsubsequent time? Thank youThanks for the post.

  2. Hi would you mind stating which blog platform you’re using?
    I’m planning to start my own blog in the near future but I’m
    having a difficult time making a decision between BlogEngine/Wordpress/B2evolution and Drupal.
    The reason I ask is because your layout seems different
    then most blogs and I’m looking for something unique.
    P.S My apologies for being off-topic but I had to ask!

  3. I just want to say I am just newbie to weblog and truly loved this web site. More than likely I’m planning to bookmark your blog post . You actually have incredible articles. With thanks for revealing your webpage.

  4. Hello colleagues, its enormous article about teachingand fully defined, keep
    it up all the time.
    istanbul escort
    şirinevler escort
    taksim escort
    mecidiyeköy escort
    şişli escort
    istanbul escort
    kartal escort
    pendik escort
    tuzla escort
    kurtköy escort

  5. I think that is an fascinating point, it made me think a bit. Thanks for sparking my thinking cap. Sometimes I get so much in a rut that I just believe like a record.

  6. Thank youThanks , I haveI’ve recentlyjust been searching forlooking for informationinfo approximatelyabout this topicsubject for a whileagesa long time and yours is the bestgreatest I haveI’ve found outcame upondiscovered so fartill now. HoweverBut, what about theconcerning thein regards to the conclusionbottom line? Are you surepositivecertain about theconcerning thein regards to the sourcesupply?

  7. With havin so much content do you ever run into any issues of plagorism or copyright violation?
    My website has a lot of completely unique content I’ve
    either authored myself or outsourced but it seems a
    lot of it is popping it up all over the web without my authorization. Do you know any
    ways to help prevent content from being stolen? I’d genuinely appreciate it.

  8. It isIt’s appropriateperfectthe best time to make a fewsome plans for the futurethe longer termthe long run and it isit’s time to be happy. I haveI’ve readlearn this postsubmitpublishput up and if I may justmaycould I want towish todesire to suggestrecommendcounsel you fewsome interestingfascinatingattention-grabbing thingsissues or advicesuggestionstips. PerhapsMaybe you couldcan write nextsubsequent articles relating toreferring toregarding this article. I want towish todesire to readlearn moreeven more thingsissues approximatelyabout it!

  9. HelloGood dayHeyHey thereHowdyHi thereHello thereHi! I could have sworn I’ve been to this siteblogwebsite before but after readingbrowsingchecking through some of the post I realized it’s new to me. AnywaysNonethelessAnyhow, I’m definitely gladhappydelighted I found it and I’ll be bookmarkingbook-marking and checking back oftenfrequently!

  10. Wow, amazing blog format! How long have you ever been running a blog for? you make running a blog look easy. The overall glance of your web site is wonderful, as smartly the content material!

  11. First of all I want to say superb blog! I had a quick question which I’d
    like to ask if you don’t mind. I was interested to find out how you
    center yourself and clear your head before writing.

    I’ve had difficulty clearing my thoughts
    in getting my thoughts out there. I truly do enjoy writing however it
    just seems like the first 10 to 15 minutes are generally lost simply just trying to figure
    out how to begin. Any ideas or hints? Appreciate it!

  12. I do not know if it’s just me or if perhaps everybody else experiencing problems with your site.

    It seems like some of the text on your content are running off the screen.
    Can somebody else please comment and let me know if
    this is happening to them as well? This may be a issue with my browser because
    I’ve had this happen previously. Thank you

  13. Christmas Eve worship will be at 6:30 p.m.

    at St. Paul Lutheran Church with a candlelight service following at 10:30.

    The address is 1800 Watts. Freeway (Summit Avenue Service Road off I-30)
    along with the number is 817-332-2281. If your date intending well,
    ask your date if she would like to maybe go down the street
    for cold drinks. On the lesbian dating website ultimately profile, people normally invest things they like to choose.

    Dinner and a movie is an exceptional first vie.

    A little conversation over dinner can often break
    the ice, also good movie could be nice. First dates ought to intimate, so
    your two people can talk and a lot study each other.
    A picnic in the park can end up being a great first date, most of the walk on their own beach, there are
    many quiet intimate places for your very own first date.
    Be creative and think about another person, would
    they be comfortable, are you comfortable while place purchased.

    Everyone is trying to make a reliable impression, hoping that between the forseeable future
    there has to be a second date. I consulted sleep
    early, and woke a several hours later, I looled at me mobile device and if was 10:35PM.

    My dog needed go to out, glad put modest shoes and went with him to
    the garden. While i looked up I saw a small point of
    light that I thought was a star. Paltalk unquestionably fun and easy to work.
    It offers unlimited video windows and has hundreds of cute and amusing emoticons that you can use as often as you really want.

    It also has new video overlays with fun animations that use the webcam.
    It has became easier to obtain real time reading on the telephone too.

    Solutions and potions . readers choose. Check the video profiles belonging
    to the readers and judge your email. There are also live panels that shows which psychics and readers are web-based.

    That being said, confidence is also and most significant thing for
    ones relationship to require is trust, which means you are not required to know all the information of where he is and what he’s
    doing and who he’s while using.

    You have to trust that he’s being as faithful to you as you’re
    being to him.

  14. I am reallyactuallyin facttrulygenuinely thankfulgrateful to the ownerholder of this websiteweb sitesiteweb page who has shared this greatenormousimpressivewonderfulfantastic articlepostpiece of writingparagraph at hereat this placeat this time.

  15. TerrificGreatWonderful articlework! This isThat is the type ofthe kind of informationinfo that are meant tothat are supposed tothat should be shared around theacross the webinternetnet. DisgraceShame on the seeksearch enginesGoogle for now notnotno longer positioning this postsubmitpublishput up upperhigher! Come on over and talk over withdiscuss withseek advice fromvisitconsult with my siteweb sitewebsite . Thank youThanks =)

  16. Thank youThanks for any otheranothersome otherevery other informative blogwebsiteweb sitesite. WhereThe place else may justmaycould I am gettingI get that kind oftype of infoinformation written in such a perfectan ideal waymethodmeansapproachmanner? I haveI’ve a projectventurechallengeundertakingmission that I amI’m simplyjust now runningoperatingworking on, and I haveI’ve been at theon the glancelook out for such informationinfo.

  17. I’d like to thank you for the efforts you
    have put in writing this site. I am hoping to see the same high-grade content from
    you in the future as well. In truth, your creative writing
    abilities has motivated me to get my own blog now 😉

  18. Hey there! This is my first comment here so I just wanted to
    give a quick shout out and say I truly enjoy reading
    through your blog posts. Can you suggest any other blogs/websites/forums
    that deal with the same topics? Thank you!

  19. This is actually appealing, You’re a significantly seasoned author. I have joined with your feed plus expect witnessing the very good write-ups. And additionally, We’ve shared your web blog inside our social networking sites.

  20. It’s amazing to pay а quiсk visit this web site and reading the views of all
    friends concerning this post, while I am also eager of gettіng familiarity.

  21. HiHello my family memberloved onefriend! I want towish to say that this articlepost is awesomeamazing, greatnice written and come withinclude almostapproximately all importantsignificantvital infos. I’dI would like to peerto seeto look moreextra posts like this .

  22. Hey There. I found your blog using msn. This is a very well
    written article. I’ll make sure to bookmark it and
    come back to read more of your useful information. Thanks for the post.
    I’ll definitely comeback.

  23. You’re so cool! I don’t think I’ve truly read through anything like this
    before. So wonderful to find another person with original thoughts on this subject.
    Really.. thank you for starting this up. This site is something that is needed on the web, someone with a little originality!

  24. Ꭲhanks , Ӏ have recently been lookіng for info aboᥙt this topic for a while and yours is
    the best I’ve came upon ѕo far. However, what
    in regards to the conclusion? Are you certain concerning the source?

  25. Just want to say your article is as amazing. The clearness
    in your post is just nice and i can assume you are an expert on this subject.
    Well with your permission allow me to grab your RSS feed to keep updated with forthcoming post.

    Thanks a million and please carry on the rewarding work.

  26. I have a lot of bookmarked websites part of Blogspot that I check daily for updates, but it is so annoying to click through a list. If I make an account is there some sort of feature where I can see new posts on the websites? (Sort of like Subscriptions on Xanga)?.

  27. Your style is very unique in comparison to other people I’ve read stuff from.
    I appreciate you for posting when you’ve got the opportunity, Guess I’ll just book mark
    this page.

  28. Oh my goodness! Impressive article dude! Thank you so much, However I am experiencing troubles with your RSS.
    I don’t understand why I cannot subscribe to it. Is there anyone else having identical RSS issues?
    Anyone who knows the solution can you kindly respond? Thanks!!

  29. Greetings from Colorado! I’m bored at work so I decided to
    check out your blog on my iphone during lunch break.
    I enjoy the info you provide here and can’t wait to take a look when I get home.
    I’m shocked at how quick your blog loaded on my cell phone ..

    I’m not even using WIFI, just 3G .. Anyways, wonderful blog!

  30. Wonderful blog! I found it while searching on Yahoo News.
    Do you have any suggestions on how to get listed in Yahoo News?
    I’ve been trying for a while but I never seem to get
    there! Appreciate it

  31. yоᥙ are truly a good webmaster. The web site loаding pace
    іs incredible. It kind of feels that you’re doing any distinctive
    trick. Also, The contents are maѕterpiece.
    үou have performed a wonderful job on this subject!

  32. What’s Happening i’m new to this, I stumbled upon this I have found It
    positively useful and it has helped me out loads. I hope to give a
    contribution & help different customers like its helped me.
    Great job.

  33. It’s in reality a great and useful piece of information. I am satisfied that
    you shared this helpful info with us. Please stay us
    up to date like this. Thank you for sharing.

  34. You are so awesome! I don’t believe I’ve truly read throᥙgh a single thing liкe this before.
    So wonderful to ԁiscover another person with genuine thoughts on this subject.
    Really.. many thanks for starting this up. This weЬ site is one thing that’s needed on the web, somеone with a bit of
    originality!

  35. Μү рrogrammer is trying to persuade me to move to .net from PHP.
    I hаve аlways disliked the idea because of the costs.
    Βut һe’s tryiong none the less. I’ve been using WordPress on several websites for about a yeaг and am nervous about
    switching to аnother platform. I have heard excellent things about ƅlօgengine.net.
    Is there a way I can import all my wordpress posts into it?
    Any helρ wouⅼd ƅe really appreciated!

One Ping
One Ping

Leave a Reply