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5 year holding Requirement for Principal Residences Property acquired in an IRC 1031 exchange may be converted from investment property to the taxpayer's principal residence. In short, a taxpayer could buy property in an exchange-having deferred gain from the sale of other investment property-and later convert that proeprty to a principal residence. The previously deferred taxes may never be owed when the property is subsequently sold because the taxpayer is entitled to a principal residence exclusion under IRC section 121. IRC Section 121 provides a taxpayer with an exemption from taxes on the gain from the sale fo the taxpayer's principal residence if the taxpayer used the property as a principal residence for periods aggregating 2 years or more within the previous 5 years. The gain excluded from the payment of tax is $250,000 for individuals or $500,000 for married couples. The new legislation, H.R. 4520 provides, in pertinent part, as follows: If a taxpayer acquired property in an exchange to which a 1031 applied, section 121 (a) shall not apply to the sale or exchange of such proeprty if it occurs during the 5-year period beginning with the date of the acquisition of such property. Now, pursuant to this new legislation, a taxpayer intending to take advantage of the Section 121 exclusion with regard to property originally acquired in a 1031 exhange, will not be entitled to the 121 exclusion, unless the peorpty ha been held by the taxpayer for more than 5 years and used as the taxpayer's principal residence for at least 2 of the 5 years. This information compliments of OREXCO. As always, verify this information with your accountant.
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