Selling two family, capital gains advice and multiple properties

Member since 2020 · 4 posts · 1 vote

I am selling my two family home in Boston, MA. I will make about 200k off this sale. I lived in the home for 5 years and rented the second half out. Am I entitled to exemption on the whole property? If not, can I use my profit to purchase two single family homes instead of one large two family? One single family will be my primary residence... the other will be rented out. Please help I’m so confused!

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Michelle Costello, congratulations you've hit the jackpot. What you have is a mixed use property that will allow you to take part of that gain tax free and the rest will be tax deferred.

Since you've lived in part for 2 out of the last 5 years you can take the amount of profit allocated to that part tax free.

Since you've used the other part of the property for investment it qualifies for a 1031 exchange.

The money you get from the sale of primary residence portion is tax free and you don't have to reinvest it at all. You can purchase a new property with it if you want but you don't have to.

The portion allocated to the investment cab be put into the 1031. In order to defer all tax you must purchase at least as much investment real estate as you sell. When using the 1031

1. You can use the 1031 to purchase one large two family as long as the investment portion is equal to or greater than the investment portion you sold.

2. You can purchase two properties as long as they are intended to be used for investment (you cannot 1031 into a new primary residence immediately)

If you want to use the 1031 to purchase two properties and move into one of them you'll need to first use it for investment for a year or two. Then you can move in and convert the investment property into your primary residence. Meanwhile the tax free portion from the primary sale is ....tax free.

It is confusing. But that's why it's not DIY. But its also a great opportunity for you!!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Michelle Costello, congratulations you've hit the jackpot. What you have is a mixed use property that will allow you to take part of that gain tax free and the rest will be tax deferred.
Since you've lived in part for 2 out of the last 5 years you can take the amount of profit allocated to that part tax free.
Since you've used the other part of the property for investment it qualifies for a 1031 exchange.
The money you get from the sale of primary residence portion is tax free and you don't have to reinvest it at all. You can purchase a new property with it if you want but you don't have to.
The portion allocated to the investment cab be put into the 1031. In order to defer all tax you must purchase at least as much investment real estate as you sell. When using the 1031
1. You can use the 1031 to purchase one large two family as long as the investment portion is equal to or greater than the investment portion you sold.
2. You can purchase two properties as long as they are intended to be used for investment (you cannot 1031 into a new primary residence immediately)
If you want to use the 1031 to purchase two properties and move into one of them you'll need to first use it for investment for a year or two. Then you can move in and convert the investment property into your primary residence. Meanwhile the tax free portion from the primary sale is ....tax free.
It is confusing. But that's why it's not DIY. But its also a great opportunity for you!!
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Michelle Costello
OP
Member since 2020 · 4 posts · 1 vote
6y
It’s making so much more sense! Thank you. My concern is the “like-property.” I understand the value has to be there or greater than, but does it matter if the property is a single family or a multi?
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Michelle Costello
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Member since 2020 · 4 posts · 1 vote
6y
So what I would do, is take that 100k and put all of it into my next investment purchase... I would not live there, I would rent it out. And the money from my “tax free” profit would go into my new primary residence.
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Lior Rozhansky
Real Estate Agent · Boston, MA · Member since 2016 · 106 posts · 69 votes
6y
@Michelle Costello I'm not a qualified intermediary, but I did do a couple of very similar transactions like Dave talked about. I had someone sell their two family (that was part owner occupied) and 1031 into a single fam that would be rented for a year (he moved into a rental in the meantime).
There was no issue with the 1031 intermediary company I was working with in going from a two fam into a single fam, it was just about moving up into a higher priced property. But I don't think you can do what you are suggesting, which is 1031 the deffered gains into a single fam investment property and owner occupy the second single fam from the exempt gains. You might want to confirm with a 1031 intermediary to be certain, but I havent seen that. I think you would need to 1031 into another 2 fam or buy a "package deal" of 2 single fams but need both of them to be rentals for one year. Feel free to PM me if you need a local contact in Boston!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Lior Rozhansky, The strategy that @Michelle Costello is contemplating is to combine a primary residence sale and 1031 on the same property. The portion allocated to her primary residence she gets tax free. and the portion that is allocated to the investment side she does a 1031 on. She uses the tax free money to purchase a primary residence. She uses the 1031 money to purchase a property (any kind) to be used for investment.
My guess is that your friend also did the same. This is a trick that any good QI should be on top of.
Now where it could get interesting for Michelle is if she just kept her tax free money in her pocket and used the 1031 to purchase a larger 2 family that she again lives in half and rents half. She can do this as long as the investment portion is at least as large as the investment portion she sells. So it actually may be possible for her to pocket cash tax free, change to a larger investment property and buy a new primary all at the same time. That's a win win win trifecta in anyones book.
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