1031 in a duplex that I live in
I know that 1031 exchanges are only for investment properties, and that you don't have to pay capitol gains on the first $250000 for your primary residence (if you're single).
So if I have lived in a duplex and rent out the other side for the last 6 years, how does that work for a 1031 exchange.
Can I take out the first $250000 as a primary residence sale, and then use a 1031 exchange on the remainder of the cap gains?
You can't exempt $250,000 of the total capital gains. Under Section 121 you can exempt up to $250,000 of the one-half of the total capital gains that represents the one-half that is your primary residence. You can use Section 1031 to defer all of the capital gains tax and depreciation recapture tax on the other one-half that is the investment property. This assumes that the two units are basically identical.
#1 1031 Exchanges Contributor
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#1 1031 Exchanges Contributor
- Qualified Intermediary for 1031 Exchanges
- St. Petersburg, FL
@Daniel Antonetti, @Account Closed is correct you get to do both. But watch out how you're looking at it. You want to view the sale of the duplex as literally two sales as far as the accounting is handled.
You are selling a primary residence that just happens to be worth x % of the entire sale. From this percentage sale you can take the first $250K in profit tax free.
You are also selling a piece of investment property that happens to be the remainder % of the sale of the duplex. This portion you can do a 1031 on.
The reason you want to approach it this way is that if the gain attributed to your primary side is less than $250K you cannot take any overage and apply it to the other side. Likewise your reinvestment requirements for the 1031 will only require you to purchase at least as much as the value of only the investment side in a 1031 if you want to defer all tax.
Even though it's really one building it's taxed like two separate buildings. It's figured proportionally based on square footage so if the two sides are equal size then each gets 50% of the cost if not it's proportional.
You'll have to get with a good Qualified Intermediary like @Dave Foster or @Bill Exeter and they'll help you get this all squared away.
#2 1031 Exchanges Contributor
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#2 1031 Exchanges Contributor
- 1031 Exchange Qualified Intermediary
- San Diego, CA
This is what we call split use property. A portion of the property is held as rental or investment use and a portion is used as your primary residence. The portion that is used as a rental or investment property would qualify for 1031 Exchange treatment and the portion that is used as your primary residence would qualify for the 121 Exclusion as long as you satisfy the requirements. The computation of the percentage allocation or split is generally done by using square footage, acreage, or some other methodology that is defensible should you be audited.
The capital gain would be allocated between the two sides (split use) via the percentage that you come up with as described above. The percentage of the gain that is allocated to your primary residence portion would be tax-free up to the $250,000 under the 121 Exclusion, and the percentage of the gain that is allocated to the rental property would be tax-deferred through the 1031 Exchange transaction.
