As of October 22, 2004, there is new law regarding the sale of ones primary residence which was purchased as part of an IRC §1031 Exchange. Under this provision, a taxpayer who exchanges into a rental house that is later converted into their home, is not allowed to exclude gain under the principal residence exclusion rules of IRC §121 ($250,000 for singles and $500,000 for a married couple filing jointly) unless the sale occurs at least five years from the date of its acquisition.

The Conference Agreement on H.R. 4520 includes the following provision to amend §121(d):

Sec. 840. Recognition of gain from the sale of a principal residence acquired in a like-kind exchange within 5 years of sale.

(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.

Example: A taxpayer purchased a rental house two years ago and then moved into it as their principal residence. Under the new law, they will have to wait three years before selling the property and excluding gain under IRC §121. The taxpayer still must meet the two out of five year occupancy test.

To qualify as a like kind Tax Deferred Exchange, the property must have been purchased with intent to hold for investment purposes or productive use in a trade of business, and not for personal use purposes.