The IRS recently addressed the tax consequences of a fact pattern where a couple's house burned down, they received insurance proceeds, and then subsequently sold the land their house sat on.
Last week I wrapped up my first semester as a professor at the University of Denver’s Graduate Tax Program, and I’ve got to say, the transition back to civilian life hasn’t been easy. I found my daughter in tears this morning, and my immediate reaction was to ask if she was suffering from “physical injury or emotional distress.
In 2019, you exchange the underlying land for other land that you intend to hold for investment that is valued at $300,000. Let’s take a look at how the IRS worked through the problems…Section 121 of the Code allows an individual to exclude up to $250,000 of gain upon the sale of a home that was owned and used as the individual’s “principal residence” for two of the five years preceding the sale.
You and your spouse had owned and used the house as a principal residence for all of 2014, 2015, and 2016, so you satisfy the two-of-five year requirement as of the date of sale at the end of 2018. Thus, you’re entitled to a maximum exclusion of $500,000. But….you rented the house in 2017 and 2018. This is NOT a period of nonqualified use, because it came AFTER the period the house was used as a principal residence.
But….remember, the land wasn’t sold; rather, it was exchanged for other land held for investment. Thus, the gain could either be excluded under Section 121 or deferred under Section 1031, because in the latter case, both the relinquished land and replacement land were held for investment.
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