IRS ISSUES GUIDANCE ON LIKE-KIND EXCHANGE
OF PRINCIPAL RESIDENCES – TAXPAYERS MAY
RECEIVE CASH BOOT WITH NO TAX!
In January, 2005, the IRS released a Revenue Procedure that affects both IRC § 121 (relating to capital gains on the sale or disposition of a principal residence) and IRC § 1031 when both are involved with a single exchange of property.
The Revenue Procedure recognizes that a single disposition of property can qualify under both of those Sections, and addresses the way in which both of those statutes apply to a single transaction. Under this Revenue Procedure: (1) gain is excluded first under IRC § 121 and any remaining gain is eligible for deferral under IRC § 1031; (2) post May 6, 1997 depreciation taken on a principal residence is eligible for deferral under IRC § 1031; (3) boot is recognized only if it is in an amount in excess of the gain deferral under IRC § 121; and (4) basis in the replacement property is calculated by treating the excluded gain as if it had been recognized.
Significantly, a homeowner who is exchanging out of property under IRC § 1031 that had been his or her principal residence qualifying under IRC § 121 is able to receive cash at the closing of the sale and is not required to pay capital gains tax on its receipt.
Further, the Revenue Procedure is effective January 27, 2005. Taxpayers may apply the Revenue Procedure in taxable years for which the statute of limitation on refunds or credits has not expired. Therefore, taxpayers who received cash in an IRC § 1031 transaction involving their principal residence in the last few years who paid tax on the receipt of the cash thinking that it was “boot” subject to tax under IRC § 1031, can file an amended return for those past tax years and get a refund or credit on their return for the amount of tax they already paid on the cash received!
Taxpayers should be urged to contact their CPA to see if the refund applies to them!
Jeffrey P. Helsdon
Certified Exchange Specialist