Recently, the House of Representatives and Senate proposed a plan to make changes to the current tax laws and codes. This plan, called the Tax Cuts and Jobs Act, has proposed a change that will affect laws and rules regarding the requirements necessary for a taxpayer to receive the tax benefits when a primary residence is sold.
Currently, a homeowner can receive a tremendous tax benefit ($250,000 tax free for a single person and $500,000 for a married couple) avoiding the payment of capital gains tax upon the sale of that home. This benefit occurs if a homeowner has lived in the home two out of the last five years. While this time doesn’t have to be consecutive, it does have to be the full two years. The proposed change would increase the time to five out of the last eight years with all other regulations remaining the same.
How Does This Change Impact My Investment Property?
While this proposed change wouldn’t have much impact on a regular sale of a property, it could impact investors looking to perform a 1031 Exchange. This is because to have a property cannot be a primary residence to be eligible for a 1031 Exchange. The property must be an investment property to be considered eligible for an exchange.
In certain instances, a homeowner will move out of their home and turn it into an investment property. If sufficient time has passed, the taxpayer can sell the home as investment property and utilize a 1031 Exchange to defer taxes.
As the law currently stands, the taxpayer will also be able to take advantage of the tax benefit of selling the home as long as the investor lived in the home two out of the last five years. If this bill passes, that time will change to five out of the last eight years.
The basic change that occurs if the bill is passed is real property must be an investment vehicle for a longer amount of time before owners are able to utilize a 1031 Exchange to defer taxes as well as receive advantages as a homeowner.
As always with new changes, we won’t know the exact implications until it is practiced in real life. Any changes passed to a tax code should be discussed with a tax professional before a business decision is made.