Tax Breaks on the Sale of Your Home, Vacation, or Investment Property

Tax Breaks on the Sale of Your Home, Vacation, or Investment Property

There will be a new tax law taking effect in 2018. Some things will change; others will not. For some Americans, the end of the year brings decision time as to selling real estate, whether it is a residence, a vacation home, or an investment property. Tax lawyer Rob Wood talks about real estate tax breaks in this report. He also discussed real estate sales in his Forbes article, “Tax Breaks On Selling Your Home, Vacation, Or Investment Property.”

Rob Wood

Rob Wood

Wood notes that there are still tax breaks to be had in the sale or exchange of real estate, although owners should keep an eye on Washington and understand that the new law may change some things. However, one tax break that doesn’t exist is a “rollover replacement rule” that allowed taxpayers “to pour the gain from selling one residence into a new and bigger house.” That provision has been gone from the tax law for a long time. Wood says that people still ask about this rule, but it has been gone for decades.

On the other hand, there is a similar sort of provision in the tax code that will not change in 2018. Real estate sellers can make 1031 exchanges, named for Section 1031 of the tax code. Wood points out that Section 1031 does not apply to sales or exchanges of personal residences. However, if a taxpayer exchanges one rental property for another one, the exchange can be tax-free. There are rules to be followed, but 1031 exchanges work very well. The real estate industry fought hard to keep this in the tax code when the new law was being written.

Wood observes in passing that section 1031 has in the past been applied to the exchange of business assets and other sorts of investment property, including even art and cryptocurrency holdings. Wood says that these kinds of exchanges will not be covered by the law after the first of the year.

There is a break for taxpayers who are selling their primary residences. A taxpayer selling a personal residence who has lived there at least two out of the last five years can exclude up to $250,000 in gain on a single return or $500,000 on a married jointly-filed return. Wood says that this provision will remain in the law. This exclusion can be used more than once.

There is another kind of exchange, the Starker exchange, worth noting. Wood explains that a Starker exchange is a type of 1031 exchange that occurs when there is not a simultaneous closing/exchange of properties. That type of exchange, says Wood, is very rare. A Starker exchange is a three-party exchange involving an intermediary who meets a set of qualifications and the parties who are swapping investment properties. A Starker exchange happens over time, but the end result is the exchange of properties.

Wood says that some taxpayers seeking to take advantage of Section 1031 will convert a private residence to a rental property, then attempt to exchange it under Section 1031. Wood says there are some unanswered questions that go along with such an exchange. How long must the taxpayer hold the property? Is actual rental required, or is it enough to hold the home out as rental property? Wood suggests that a least a year should be the minimum for a taxpayer trying to make this kind of exchange.

Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.

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