subject: Information about Rental agreements [print this page] Information about Rental agreements Information about Rental agreements
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Most real estate investors know that a Section 1031 exchange can reduce the tax consequences of selling rental property. They also know that a personal primary residence will not qualify for an exchange. Many investors may not, however, realize that the fact that a real estate investor who has lived in a unit of a rental property or operated a business in part of his residence may be able to utilize Section 1031 in conjunction with Section 121 in order to reduce or eliminate taxation of gain in disposal of the property.
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The amount of gain that can be avoided is $250,000 for a single taxpayer and $500,000 for a married couple filing jointly.As an example, assume a farm property that includes a home utilized as the primary residence of the owner.Most real estate investors know that a Section 1031 exchange can reduce the tax consequences of selling rental property. They also know that a personal primary residence will not qualify for an exchange. Divide the property so that the home, along with some included land, is treated as the seller's primary residence and the remaining land and outbuildings can be treated as a business property.
As a final example, consider the case where the owner(s) of a single family home utilized one-half of it for a primary residence and one-half for a business of some kind and meets the requirements of Section 121. In this case, unlike the previous example, the owner(s) are allowed to maximize the personal residence exclusion ($250,000 or $500,000) no matter what percentage of their residence was used for business.
The new business property exchanged into, must, however, have a cost of at least the sale price less the personal exclusion amount utilized. For our example, this means that a new property for at least $600,000 ($850,000 minus $250,000) or $350,000 ($850,000 minus $500,000) must be purchased under Section 1031.
