1031 Exchange for 50% of Owner-Occupied Property

3 Replies

I own a 4 unit apartment building, live in 50% of the building and rent out the remaining 50%. I'd like to sell the building and do a 1031 exchange for the 50% share that is income property by purchasing a like-kind property, and take the $500k personal capital gains exemption (married) for the other 50% in which I reside. Is this possible? Thank you for any insight you can provide.

@David Pedersen , - Doable and advisable.  A very sound move providing you meet the residency requirements for the primary residence exclusion of sec. 121.  If you've lived in that 50% for two of of the last 5 years then you are good to go.  

Your accountant has already established basis for each side and the investment side is being reported on your schedule E.  From there it will be an easy matter for them to use the form 8824 to record the 1031 exchange on the 50% rental and re-establish basis and defer tax on that. The 50% residence will be tax free.

You don't indicate that you'll be using part of the 1031 to purchase another residence but make sure you don't.  Use the full proceeds from the investment portion to purchase all investment replacement property.  The rule of like kind are such that any type of investment property will qualify. 

 If you do want to purchase another mixed use property you will want to make sure that the allocation for the investment portion will cover the net sale allocation for the investment part of what you are selling.  

The tax free money is obviously yours to use however you want including purchase another residence.

Thank you Dave! This is fantastic. Yes, I have lived in the 50% for two of the last five years and my Schedule E does reflect the income portion of the building. My plan would be to buy a less expensive multi-unit investment property, ideally all cash, as a 1031 exchange and put the $500k personal exemption down on a nice single-family home to live in. Does this all sound right still?

Yep, great plan - your reinvestment target in the 1031 to avoid all tax on the investment side will be the amount of your net sale - gross sales price of investment portion less costs of sale for the investment portion but before any mortgage pay off..  If you want to buy less than that you can but the irs will view that as taking profit and you will pay tax on the difference. 

Your family will appreciate the nice pot at the end of the rainbow after doing the owner on site thing won't they?!  Holler if I can be of further service.

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