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It May Be Time to Sell that Income Property

August 18, 2008

…if you are looking to pull your $500K worth of 121 exemptions from it, that is.

Yes, I am talking about the IRS code again. Section 121:

Section 121, as amended, provides that a taxpayer may exclude from gross income up to $250,000 of gain on the sale or exchange of a principal residence if certain conditions are met. In certain circumstances, a married individual filing a joint return for the taxable year of the sale or exchange may exclude from gross income up to $500,000 of gain. This exclusion also applies to the sale or exchange of stock held by a tenant-stockholder in a cooperative housing corporation (as defined in § 216) and may apply to the sale or exchange of a remainder interest in a principal residence if the taxpayer so elects. See Code §§ 121(d)(4) and (d)(8).

One of the greatest “get rich quick” schemes of the last decade has been the 1031 coupled with the 121. Add on top of that, the ability to convert an income property to a primary residence just by living there for two years and we’ve hit the motherload, baby!

Well, if the real estate market hasn’t already come to to a screeching halt, this new “Housing and Economic Recovery Act of 2008” will do just that. Or maybe it will jettison all those fence sitters into selling that non-performing property while they can still get $500K out of it.

Either way, if you were planning on converting a second home or investment property into a primary residence so you could pull $500K worth of tax free money out of it, your better get the “pulling” done by the end of 2008. After that, your equity will become pro-rated based on the amount of time you held the property as an investment vs how much time it was a primary residence.

That sucking sound is the IRS sucking the wind out of your profits.

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