Legislation changes like-kind exchange rule.

On October 22, President Bush signed into law corporate and foreign tax legislation that contained a provision affecting IRC [section] 1031. Under this provision, an exchanger who performs an IRC [section] 1031 tax deferred exchange into a rental house as replacement property, which is later converted into the exchanger's principal residence, is not allowed to exclude gain under the principal residence exclusion rules of IRC [section 121 unless the sale occurs at least five years after the closing date of the replacement property purchase.

The Conference Agreement on H.R. 4520 includes the following provision: Sec. 840. Recognition of gain from the sale of a principal residence acquired in a like-kind exchange within five years of sale. (10) Property acquired in like-kind exchange--If a taxpayer acquired the 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 five-year period beginning with the date of the acquisition.

The change to IRC [section] 121 is effective for principal residence sales occurring on or after October 22, 2004 and all investors who previously acquired their current residence through a [section] 1031 exchange within the past three years will now have to wait at least two more years before selling the residence to exclude the gain. This assumes they meet the two out of five year principal residence test.

PAMELA A. MICRAELS, ESQ.

NORTHEAST DIVISION MANAGER

ASSET PRESERVATION, INC.