1031 exchange owner occupied unit

3 Replies

Hello: I am selling my owner occupied two family home and buying a single family home. Similar value and mortgage on the properties. I am planning on converting part of my new primary home into an accessory apartment and renting it out. Is there any way that I can use a 1031 exchange with this sale and purchase. In my current two family the ratio of living space to rental space is 55/45. In my new home it will be 80/20. 

@Sarah McCarty ,  The 1031 begins with the sale of qualified property.  In your case you want to think that you are actually selling two properties - one is your primary residence and one is an investment property.  They each happen to be a % of the same larger piece of property.  So you can 1031 the 45% investment piece of your current property into new investment property.  In this case it just happens that the new investment property is 20% of a piece of property you are purchasing.  You'll need to make sure that the allocation for the investment portion of your new purchase is at least as much as the allocation of investment in the new property.

Where it's going to get fuzzy is in the use, documentation, and timing of the purchase of the new property.  You indicated that you were going to convert part of the new property into investment.  You'll want your accountant on board for this one since the documentation will be internal as to what, how much, and when the investment portion will exist.  But it's probably doable.

@Sanjay Aiyar , Youre absolutely right about the application of sec 121 and the primary residence exclusion for them.  

But that property has been divided into a primary residence and an investment property.  The OP has been treating the property as split use.  So when they sell they cannot take the primary residence exemption on the portion they have been using. for investment.  They'll need to do a 1031 exchange for that portion.  

They will get 55% of the sale and gain tax free up to the limits and will have to 1031 45% of the sale into new investment property.

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