Monday, September 22, 2008

Principle Residence Exclusion

Updated: Amendment to §121 May Affect §1031 Exchange Planning
Author: Ron Ricard, CES®, Asst. Vice President, Sales Manager

The housing Assistance Tax Act of 2008, signed by President Bush on July 30, 2008, includes a modification to the Section121 exclusion of gain on the sale of a primary residence.This modification may affect taxpayers who exchange into a residential property, and then later convert the property to a personal residence, as explained below.
Under Code Section 121, a taxpayer can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a principal (primary) residence if they have owned and occupied the residence for two years during the five year period preceding the date of sale. Gain related to depreciation deductions taken on the property since May 6, 1997 is
not eligible for exclusion.
Effective January 1, 2009, the exclusion will not apply to gain from the sale of the residence that is allocatable to periods of “non qualified use.” Non qualified use refers to periods that the property is not used as the taxpayer’s principal residence. This change applies to use as a second home as well as a rental.
How does this affect 1031 planning? Suppose the taxpayer exchanged into the residence and rented it for four years, and then moved into it and lived in it for two years. The taxpayer
then sold the residence and realized $300,000 of gain. Under prior law, the taxpayer would be eligible for the full $250,000 exclusion and would pay tax on $50,000. Under the new law, the
exclusion would have to be prorated as follows (the example does not take into account deprecation taken after May, 1997, which is taxable anyway).
Four-sixths (4 out of 6 years) of the gain, or $200,000, would be ineligible for the $250,000 exclusion.
Two-sixths (2 out of 6 years) of the gain, or $100,000, would be eligible for the exclusion.
Importantly, non qualified use prior to January 1, 2009 is not taken into account in the allocation for the non qualified use period (but is taken account for the ownership period). Thus, suppose the taxpayer had exchanged into the property in 2007, and rented for 3 years until 2010 prior to the conversion to a primary residence. If the taxpayer sold the residence in 2013 after
three years of primary residential use, only the 2009 rental period would be considered in the allocation for the non qualified use. Thus, only one-sixth (1 out of 6 years) of the gain would be ineligible for the exclusion.
In general, the allocation rules only apply to time periods prior to the conversion into a principal residence and not to time periods after the conversion out of personal residence use. Thus, if a
taxpayer converts a primary residence to a rental and never moves back in, and otherwise meets the two out of five year test under Section 121, the taxpayer is eligible for the full $250,000 exclusion when the rental is sold. This rule only applies to non qualified use periods within the 5 year look back period of Section 121(a) after the last date the property is used as a principal residence. Therefore, if the taxpayer used the property as a principal residence
in year one and year two, then rented the property for years three and four, and then used it as a principal residence in year five, the allocation rules would apply and only three-fifths (3 out of 5 years) of the gain would be eligible for the exclusion.

Peninsula Investment Forum Marketing Meeting


Guest Speaker: Michael Pierce, President, Prodesse
Michael Pierce is the co-founder and President of Prodesse Property Group. Prodesse was founded in 1993 to provide professional management services to the owners of income properties, and now manages over $250 million in real estate assets in San Mateo, Santa Clara and Santa Cruz counties. In 2005 the principals of Prodesse formed Prodesse Investments, which invests in B and C class apartment buildings and is currently looking for rehap opportunities. Michael will give us an update on the Silicon Valley apartment market and his
prognosis for 2009. He will also discuss his current investment strategy and acquisition criteria.
DATE: September 23, 2008 (fourth Tuesday of each month)
***PLEASE NOTE NEW ADDRESS: 1700 South El Camino Real
San Mateo, CA
THE PENINSULA INVESTMENT FORUM provides the opportunity to market your exclusive for sale listings to professionals in the commercial investment real estate community. Please bring 40 copies of your package for presentation. Please also email Neil Santiago with your available properties for sale at Minimum purchase price of $750,000.
Sponsored by:
Paul Monaco-First American Title (408) 451-7871
Mary Kay Kennedy-First American Exchange (800) 833-4343
Neil Santiago-Bridge Bank (650) 462-8522
Janine McCaffery-ABD Insurance (650) 678-6661

San Jose Rock & Roll Half Marathon

All you runners out there: time to sign up for this great event in San Jose. On a hopefully clear and cool Sunday morning 13 days from now on October 5, 2008, you and some 13,000 other runners will line up to cruise through 13.1 miles around downtown San Jose and the Rose Garden. Highlights of the course are: City Hall, Japan Town, the juvenile detention facility (kidding), San Pedro Square, a concert at HP Pavilion, University Avenue and a final run down The Alameda with a finish at Plaza de Cesar Chavez (where the snake statue is). The Rock & Roll 1/2 Marathon San Jose will be another great event for our town. Also keep in mind the Silicon Valley Leadership Group's Turkey Trot (their race site is not up yet) on Thanksgiving morning - a light 10k before stuffing yourself and watching football. If anyone wants to run with me, drop me a line. I will have a good group of runners for both events.