Tax Law Update That Apply To Real Estate Ownership
Gain on
sale of your principal residence can be tax-free up to $250,000 ($500,000 in
some cases, on a joint return). But Congress has just limited tax-free treatment
where the property was acquired in a tax-free exchange. The new rule applies
where the taxpayer acquires, say, residential property being rented in exchange
for property the taxpayer owns “of like kind”—which could be residential
rental property or other investment property. The taxpayer may then convert the
property acquired to use as his or her own principal residence, and later sell
it and claim tax-free gain. The 2004
Act makes the home sale gain taxable if it happens within 5 years of the date
the property was acquired in a tax-free like-kind exchange. Congress reasoned
that like-kind exchanges are to defer tax, and should not be used to avoid
tax. The rule is that where property worth more than its cost basis is swapped
for “like” property, the basis of the property transferred becomes the basis
of the property received. The built-in gain (value less basis), plus any future
appreciation, is taxed on sale of the property received. This principle is
frustrated if property received can be sold tax-free. The new
rule applies to sales after October 22, 2004. Note:
There’s
no sliding scale here. If the residence is sold within 5 years of the date it
was acquired in a tax-free like-kind exchange, none of the gain is tax-free. If
it’s sold more than 5 years after acquisition, the sale gain qualifies in full
for tax-free treatment up to the $250,000 ($500,000) ceiling.
For taxpayers in the 10% or 15% bracket--5% For taxpayers in higher brackets--15% Tax on unrecaptured Sec. 1250 gain (depreciation taken)--25% Capital gain rate on collectibles--28%
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