Number: RS22113
Title: The Sale of a rincipal Residence Acquired Through a Like-Kind Exchange
Authors: Gregg Esenwein, Government and Finance Division 
Abstract: When business or investment property is exchanged for property of a "like kind," (often referred to as a 1031 exchange) no gain or loss is recognized on the exchange, and therefore, no tax is paid at the time of the exchange on any appreciation in the value of the property . The like-kind exclusion is sometimes combined with the exclusion of tax on the gain from the sale of a principal residence. In effect, this combination can allow taxpayers to avoid paying tax on the gain from the sale of their investment property. The American Jobs Creation Act of 2004, enacted on October 22, 2004, addressed this issue of combining like-kind exchanges with the exclusion of tax on the sale of a principal residence. As of the date of enactment, the exclusion for gain on the sale of a principal residence no longer applies if the principal residence was acquired in a likekind exchange within the past five years. In effect, this requires the taxpayer to hold the exchanged property for a full five years before it would qualify as a principal residence. This change reduces, but does not eliminate, the attractiveness of combining like-kind exchanges with the principal residence exclusion.
Pages: 4
Date: April 12, 2005