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When you sell your personal residence (the house you live in), the IRS says $500,000 of the gain ($250,000 if you’re single) is tax free. There are some things that you have to do to qualify for this benefit, the most important of which is that you must live in the house for at least two of the last five years.

There is a different code section, Section 1031, that says if you sell a house that’s been a rental for at least the last year (or two years in some situations), you can roll the gain from the old house to the new house and defer the tax on the gain until you sell the new house.

Sometimes these two IRS rules overlap. For example, when you sell your residence, it has to have been your residence for two of the last five years. Two of the last five… so what was happening during the other three years? Well, if you’ve lived in the house for all five years there’s no problem – just sell the property and $500,000/$250,000 of gain is forgiven.

Although Donald Trump has been President for less than 50 days (as I write this), certain things about him and his agenda are becoming clear: he has a very clear vision about what he wants to accomplish, and he is very determined to push his changes through. 

Tax reform is high on his agenda, and because he has a Republican majority in both the House and the Senate, it’s likely there will be some form of tax legislation proposed later this year. Since I’m a retired CPA and I make my living in the Section 1031 tax arena, I’m very concerned about the possibility of changes to this Code Section and how these changes would impact my clients. 

The IRS has granted special relief for taxpayers whose exchange was impacted by Hurricane Ian. If you are doing a 1031 exchange anywhere in the State of Florida on property that you sold, bought or are buying, or you live in the State of Florida, the IRS has automatically extended your 1031 deadlines. After the closing of the sale of your old property, IRS law requires that within 45 days you give the agent handling your exchange a list of properties you might buy to complete your exchange, and then requires that you complete the purchase of at least one of those properties within 180 days. The Disaster Relief extends these deadlines.

Several years ago, the state of California adopted a claw-back rule for 1031 exchanges when the sale property is in the State of California and the replacemnet property is in a different state.

Like most states, California does not tax sales of real estate when the taxpayer does a 1031 exchange and rolls the gain over to a replacement property. Typically, when you sell a property in one state and buy in another state (doing a 1031 exchange), the selling state loses the tax revenue that would have resulted from the sale if it were not a 1031 exchange. 

Several years ago California broke with that tradition and revised their 1031 law to hold that when the taxpayer ultimately sells the property in the replacement state in a taxable transaction, the taxpayer must report the original gain to California and pay tax on it. For example, Sue sells a rental property in California and rolls a gain of $100,000 into a property in Denver, Colorado by doing a 1031 exchange.