GMAC Real Estate Tax Free Cash from Exchange
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Tax Free Cash from Exchange

Takeaways

  • A 2005 tax rule allows primary homeowners to combine the benefits of a 1031 exchange with the IRC 121 tax exemption.
  • This applies to previous primary homes that have become investment second homes.
  • Investors pocket the cash difference when "selling" that property through a 1031 exchange and "buying" less expensive real estate on the other end of the trade.

Did you know?

  • 1031 Exchanges can be complicated, but can be a source of tax-free revenue.
This rule is a cash gift from the government.The 1031 exchange applies specifically to investment real estate. Internal Revenue Code 121 providing a tax exemption of $250,000 for singles and $500,000 for couples applies only to the sale of a person’s primary residence. February 14, 2005, the government created new guidelines that brought these two great tax tools together. These new guidelines allow homeowners who keep their onetime primary residence as a rental property to sell that real estate through a 1031 exchange, buy a less expensive home to complete the sale and pocket the difference tax free because of the IRC 121 exemption.

In the eyes of the IRS the one-time primary residence turned rental real estate is an investment property in terms of the 1031 exchange, and at the sale is still considered a personal residence in terms of IRC 121 as long as the home was the primary residence for two of the previous five years. In effect you can mix the rules on investment second homes and primary residences. The net result is tax-free cash from a real estate exchange.

This process is more than a little convoluted, but it can create a lot of tax-free money when implemented properly. To look at an ideal example, your primary is residence is worth $200,00, but you’re certain the home is going to appreciate over the next few years. You move out and rent your previous primary residence for two years and sure enough after that period the house is worth $250,000. Using a 1031 exchange you sell the home and buy a lake house for $100,000. Using your IRC 121 exemption the $150,000 difference in the trade is now yours to pocket completely tax-free.

Search for Second Homes for Sale

To search for a selection of second homes for sale, please visit lifestylehomesearch.com, or visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.