1031 Rules with Duplex in Los Angeles

[Eric Robert]

Im looking into selling my duplex and using the 1031 Exchange to purchase a property that brings in greater cash flow. 

Details

Mortgage - $350,000

Appraisal - $550,000

With this information I could roll the $200,000 "profit" into a bigger property. Here is where my confusion begins:

I use the front unit as a rental and I use the second unit as my primary residence. Would the rules of rolling over the entire $200,000 "profit" into the new property apply to me? Since I use the 2nd unit as my primary residence, would I be able to use some of the $200,000 as cash without any tax penalty?

Any thoughts or advice would be great!

[Bill Exeter]

Originally posted by @Moses Kagan:

First: I'm not a lawyer or accountant, so don't rely on this advice.

That said: you're within the cap gains allowance for primary residence. In other words, you don't need to 1031... You won't pay tax on your gain anyway.

Moses, this is not correct.  The duplex consists of two separate units.  Your statement would be correct if it was a single dwelling with one common entrance, but that is not the case with a duplex. 

So, in this case, assuming that both units are identical in size, 50% of the gain would be allocated to the primary residence portion of the property and 50% would be allocated to the rental property portion. 

The gain allocated to the primary residence portion of the property would qualify for the 121 Exclusion, which means that up to $250,000 in gain, if the person is single, or $500,000, if they are a married couple, would be excluded from taxable gain under Section 121 of the Internal Revenue Code ("121 Exclusion"). 

The gain allocated to the rental property portion of the property would qualify for a 1031 Exchange since it has been rented out.