There are obviously tons of items in the just signed tax law that are of interest to various groups of people.

One that is of great interest to us has to do with people who sell homes that were originally acquired as part of a 1031 exchange. Effective tomorrow, the tax free exclusion of up to $250,000 of gain per person is only allowable if the property was originally acquired more than five years prior to the sale. The seller would also need to meet the test of occupying the property for the requisite two years.

Here is the actual text from the new law:

SEC. 840. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL RESIDENCE ACQUIRED IN A LIKE-KIND EXCHANGE WITHIN 5 YEARS OF SALE.

(a) IN GENERAL- Section 121(d) (relating to special rules for exclusion of gain from sale of principal residence) is amended by adding at the end the following new paragraph:

`(10) PROPERTY ACQUIRED IN LIKE-KIND EXCHANGE- If a taxpayer acquired property in an exchange to which section 1031 applied, subsection (a) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to sales or exchanges after the date of the enactment of this Act.

This doesn’t change or even codify how long a property has to be used for rental, business or investment purposes before it can be converted to a primary residence with no tax consequence. It only says that the Section 121 exclusion is not available if the home is sold in less than five years after its original acquisition.

This will put the property owners in a tricky situation. If it is being used at the time of sale as a primary residence, the entire gain will be taxable, including the deferred gain that had been rolled into the property via the 1031 exchange.

Since primary residences being disposed of are not eligible for 1031 exchange treatment, my initial reaction to this scenario would be to advise the property owners to consider converting the home back to rental usage for as long as possible prior to the sale and then set it up as a 1031 exchange into new rental property that can then be later converted into a primary residence.

This game plan would obviously be a lot of hassle; but the taxes could be substantial if these steps aren’t taken. Obviously, the property owners should work with their personal tax advisors to crunch their exact numbers to see if it makes sense.

Q:

Good Morning!

I have read some of your responses to the 179 deduction and I appreciate you taking the time to help others make wise tax decisions. I have had a stellar year as an employee I have paid a small fortune in taxes to federal and state. I have also been fortunate to sell some stock options and cashed out a deferred comp plan. My taxes due next year are quite significant. As of this week I have formed a single member LLC and will be purchasing heavy machinery over 6,000 GVWR. The business will no doubt take a substantial loss this year due to the lateness of the year and startup expenses. Is it possible that my gross income including the stock sale is too much whereas disallowing me the opportunity to use the 179 deduction to its fullest? Is it possible that AMT could limit the amount of deduction I can take for the 179 deduction.

Again thank you for being so helpful in sharing your knowledge.

A:

There is no high income phase-out for the Section 179 deduction that is claimed on the front of the 1040, as it sounds like yours would be. There is a phase-out for those who claim it on Schedule A, normally as an employee expense.

If you didn’t catch the news today, the Section 179 deduction for business vehicles weighing under 14,000 pounds has just been lowered to $25,000 from the $102,000 maximum we had previously.

AMT is the most difficult tax to calculate without some actual number crunching. Capital gains and stock options can trigger the AMT. You should have your personal tax advisor run your numbers for you to see if that will be the case for you.

Another, probably less expensive, way to get a preview of your 2004 taxes is to get a copy of one of the cheapo 2003 tax programs, such as Turbo-Tax, and enter your 2004 figures. It won’t be exact; but it will give you a pretty good ballpark idea of where you will be.

Good luck. I hope this helps.

Kerry Kerstetter

Bush Signs $136 Billion Corporate Tax-Cut Bill – The new limit for business SUVs under Section 179 will take effect tomorrow, October 23.

More Details: Bush Signs $136B Corporate Tax Cut Bill

Here is the actual text of the provision limiting SUVs to $25,000:

SEC. 910. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN PASSENGER AUTOMOBILES.

(a) IN GENERAL- Section 179(b) (relating to limitations) is amended by adding at the end the following new paragraph:

`(6) LIMITATION ON COST TAKEN INTO ACCOUNT FOR CERTAIN PASSENGER VEHICLES-

`(A) IN GENERAL- The cost of any sport utility vehicle for any taxable year which may be taken into account under this section shall not exceed $25,000.

`(B) SPORT UTILITY VEHICLE- For purposes of subparagraph (A)–

`(i) IN GENERAL- The term `sport utility vehicle’ means any 4-wheeled vehicle–

`(I) which is primarily designed or which can be used to carry passengers over public streets, roads, or highways (except any vehicle operated exclusively on a rail or rails),

`(II) which is not subject to section 280F, and

`(III) which is rated at not more than 14,000 pounds gross vehicle weight.

`(ii) CERTAIN VEHICLES EXCLUDED- Such term does not include any vehicle which–

`(I) is designed to have a seating capacity of more than 9 persons behind the driver’s seat,

`(II) is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment, or

`(III) has an integral enclosure, fully enclosing the driver compartment and load carrying device, does not have seating rearward of the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.’.

(b) EFFECTIVE DATE- The amendment made by this section shall apply to property placed in service after the date of the enactment of this Act.