Proving once again how tax laws are so wide open to different interpretations, I received the following from a 1031 exchanger on the Left Coast in response to my earlier posting on this topic.

Hi, saw your post in the blog re the change in the new tax bill that just went into effect, disallowing the capital gains exclusion for sale of a personal residence within 5 years of its acquisition via 1031 exchange.  I am wondering how you interpret the language "...sales or exchanges after..." the effective date of the act.  Why mention exchanges?  Are they trying to say that if the exchange took place prior to the effective date, this doesn't apply?  If the intent is to make it apply immediately to all such sales, regardless of when the 1031 exchange took place, why mention "exchanges" at all in this phrase?

Regards,

My reply:

I have to agree with the FEA's interpretation of this provision (which I will forward to you) that it would apply to any residence disposition after the 10/22/04 enactment date of the new law.  My guess is that the law mentions "sales or exchanges" in relation to the disposal of a residence in order to include non-cash transactions, such as someone swapping a residence for another property.  Such a deal would be considered a taxable event based on the fair market value of the other property received and would not be eligible for the Sec. 121 exclusion, even if the original property was acquired prior to 10/22/04.

It would obviously be nice if properties acquired prior to 10/22/04 could be grandfathered in and allowed to use the tax free exclusion; but I have never seen any language allowing that to happen.

I hope this helps. 

Kerry Kerstetter 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/31/2004 02:13:00 PM Send this post: