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For Homeowners: A Way to Double Your Tax Pleasure
Believe it or not, homeowners can now cash in on an unprecedented double tax benefit: You can combine the tax-free home-sale exclusion with a like-kind exchange of the home. Does this sound too good to be true? A new IRS ruling gives the tax strategy the seal of approval.
How it works: Under the home-sale exclusion, you can exclude from tax the first $500,000 of home-sale gain ($250,000 for singles) if you have owned and used the home as your principal residence for at least two out of the previous five years.
In addition, you can swap business or investment property tax-free for other like-kind property. You are only taxed on any "boot" you receive in the deal (e.g., as cash or assumption of a mortgage). However, your basis in the new property must be adjusted to reflect the exchange.
By converting your current home into a rental property, you can qualify for the home-sale exclusion and defer any tax on the excess gain when you swap it for a similar property. Similarly, you may qualify for this two-way tax break if you use part of your home as an office. In the new ruling, the IRS says that home-sale exclusion is applied before the like-kind exchange rules.
Obviously, there is more to this deal than the space in this publication allows. Be sure to obtain details pertaining to your personal situation.