The Internal Revenue Code provides a variety of tax saving opportunities for savvy planners. For example, Section 1031 of the Code details tax deferred exchanges. Section 121 provides direction on the sale of a personal residence and the allowances for exclusion from tax. Guidance on how these two sections intersect and complement each other is provided not in the code itself but in a separate Revenue Procedure, in this case, Revenue Procedure 2005-14.
It is possible to use the full exclusion of $500,000 provided in Section 121 upon the sale of a personal residence and also use Section 1031 for the commercial/investment portion of the same property to defer additional tax exposure. This is particularly helpful for larger homes that have significant land associated with the property. It can also provide tax protection in cases where a portion of the property has been used for rental to others or used as a home office. It is important to note that it is not necessary to chose which code section to employ; they can be used in concert with each other.
Advance planning will produce the best results so don’t wait until the sales agreement is in hand to figure out how to employ the right tax strategy. There is protection by the numbers.
