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Income Tax Saving Strategies

Income Tax Saving Strategies

1031 Exchange

A 1031 tax exchange is a tax deferring strategy used to save the equity in an investment property you are selling and replacing with another. The following steps are the basics of how it works. 

  1. A seller lists his/her property for sale.
  2. Upon close of escrow any monies gained are placed in a 3rd party holding account. There is a flat fee for this service and interest made during the holding period goes to the holding company.
  3. The seller has 45 days after the close of escrow to identify 3 properties in which he/she has an interest in purchasing. These must be of equal or greater value as the sold property, and must be investment type property, not a primary residence.
  4. The seller has 180 days after the close of the original escrow to close escrow on a new investment property.
The key numbers to remember are 45 and 180. Missing one of these dates will require the payment of capital gains. The seller can identify properties at anytime during the sale of the original property, however, the original property must close escrow prior to closing escrow on a new investment type property.

Click here to be directed to the IRS website to further explain the rules regarding a like-kind exchange: https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031


IRC 121 Primary Residence Tax Exclusion

To exclude gain on the disposition of a home from income under IRC section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers). The IRS has issued proposed regulations to clarify how these rules work in certain situations.
  • A taxpayer is considered to have owned and used a home as a principal residence during the time his or her deceased spouse used the home as a principal residence. This rule applies as long as on the day the home is sold the taxpayer’s spouse is deceased and the taxpayer has not remarried. Divorced spouses can also benefit from the ownership and use periods of former spouses to satisfy the exclusion requirements.
  • Taxpayers must recognize gain on any portion of a residential property they don’t use for residential purposes. Any post-May 6, 1997 depreciation allowable on the property triggers recognition of otherwise excludable gain.
  • A taxpayer can generally claim only one exclusion every two years. However, a taxpayer who disposes of more than one residence within two years or who otherwise fails to satisfy the requirements, for example due to a job change or health problem, may qualify for a reduced exclusion amount.

Click here to be directed to the IRS website to further explain the rules regarding a primary residence tax exclusion: https://www.irs.gov/uac/irs-issues-home-sale-exclusion-rules 

If you believe you might be able to take advantage of any of these strategies but need more information please contact anyone on our team. We will be happy to direct you to the right resource to assist you in making your decisions.


We are not tax advisors. Be sure to check with your tax accountant to verify how you will be effected by any of the information described on this page.