Q. How Can YOU Turn Investment Property Into Tax Free Cash? A.  According to "THE 1031 EXCHANGE EXPERTS LLC," a little-known, but increasingly

popular way of turning investment property into tax free cash is to sell an investment property, such as a duplex, and then roll the gain -- tax deferred -- into a single family residence via a 1031 exchange. To qualify for the exchange you have to hold the new residence as investment property for at least three years and a day, and our clients typically do this by renting it, or trying to rent it during this time. Once this investment period is up, they then move into the residence and convert it to their home. Under 'current' law (Section 121 IRC), if you live in a home as your primary residence for at least two years, the exclusions from capital gains taxes available to you when you sell it are up to $250,000 if you file a single return and up to $500,000 if you file a joint return.

So for example, Fred and Sue sell their purple duplex and defer their $400,000 gain by buying a single family rental house. They have to rent, or try to rent this house, for three years and a day before they can move into it (so as to not invalidate their exchange). Under this law, they could move into the house (after their three years and one day) and live in it for the next two years, and then sell it -- and the first $500,000 of gain would be excluded, even if $400,000 of the gain was rollover gain from their 1031 exchange.

By effectively using two different sections of the tax code (Section 121: sale of your primary residence, and Section 1031: tax-deferred exchanges) you completely 'vaporize' your capital gains taxes (up to the limits mentioned)! You've not only deferred your gains through a 1031 exchange, but eventually eliminated the capital gains up to the exemptions noted -- You've turned investment property into tax free cash!

Make sure that you use a Qualified Intermediary that knows how to structure your exchange with this strategy well thought out in light of the new laws. Check with a tax professional for your particular circumstances.
 

This information, though believed to be accurate, should not be relied upon without verification by consulting a tax professional.

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