1031 exchange, improvements, principal residence

Dear 1031x.com: I have two questions: 1.  How do we account for improvements to the propert?  What is  included/excluded?  What records do we need. 2.  If we decide to live in the property for two years, we understand that  you only need to be there one half each year.  Is this correct?

Dear B:  Improvements fall into one of two catagories: 1) repairs, or 2) capital improvments.  Repairs are minor and are dedcutible expenses of operating investment property in the year they are incurred. Capital improvements are more major and are not deducted in the year incurred; instead their cost is added to your tax basis.  Therefore, capital improvements increase your annual depreciation allowance, and decrease your gain, if and when you sell.  Sometimes the distinction between a repair and a capital imrpovement is difficult to make.  In answer to your second question, in order to qualify for tax exemptioon under IRC section 121, you must live in and own the property for two years.  You can only have one principal residence at a time.  Usually your principal residence is the place where you spend the majority of your overnights.  So, yes, if your spend at least 50% of your night at your principal residence and otherwise treat it as your principal residence you will qualify under 121.  I hope this helps. Sincerely   

Steve Hickox
Attorney / President