November 25, 2019 10:21 pm

Home Sale Exclusion and Like-Kind Exchange for Same Vacant Land

Homeowners who meet ownership and use tests can exclude gain on the sale of a principal residence up to $250,000 ($500,000 on a joint return). Taxpayers who hold property for investment can defer gain on a like-kind exchange of real property. Can both these favorable tax rules be combined for the same property? The IRS says yes.

In a recent private letter ruling (Letter Ruling 201944006), homeowners owned and lived in their residence for the requisite period and then rented it out. A fire destroyed the home and they sold the vacant land, using the sales proceeds plus insurance proceeds on the residence, to buy two other rental properties. Their gain exceeded the home sale exclusion. The IRS ruled that they could defer the remaining gain under the like-kind exchange rule, so they had no current tax on these transactions.

Note: This private letter ruling, which is not precedent, has the same reasoning as expressed in Rev. Proc. 2005-14. That pronouncement contained five extensive examples showing the interaction between the home sale exclusion and like-kind exchange rules.

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Tax Glossary

Constructive receipt

A tax rule that taxes income that is not received by you but that you may draw upon.

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