Real-Estate Sales Raise
Some Thorny Tax Issues

Question: I am interested in purchasing a "fix and flip" property. What are the tax laws that will affect the capital gains I will realize if I sell it in six months to a year? Can I roll the money over into another investment property right away or do I have a certain period of time to find another investment property to avoid the tax hit? Is this situation similar to 1031 exchanges with rental properties?

Regarding my primary residence, if I decide to sell it before I have lived there for two years, can I roll the capital gains over into my new home? Or has this law been totally replaced by the "two out of five" primary-residence exclusion?

-- Rob, Denver

Rob: You have a lot of tax questions. I suggest you spend a few bucks (it won't cost much) to have a long talk with a tax adviser about your specific situation. A column like this can't give you definitive answers.

But in general, the "rollover" rule for a personal residence to which you refer, which allowed taxpayers to defer a gain into another property, has been repealed. You are correct in that you must now use the property as your personal residence for two out of the five previous years to claim the personal exclusion of as much as $250,000 ($500,000 for married couples).

The rules are different for property held for business purposes, such as rental homes. Here you may, in effect, roll over your gain using a 1031 tax-deferred exchange. But there are very specific rules for determining if a property qualifies and strict timelines for the trade. Generally speaking, you must identify the property to be traded within 45 days of the trade and complete the transaction within 120 days. Again, I suggest you talk to your tax specialist for the details. You may also want to look into my book, "How to Get Started in Real-Estate Investing" (McGraw-Hill, 2002), which goes into many of your areas of concern.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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