1031 exchange eligibility

[Toby Sheehan]

Getting ready to move on from an investment property and looking for some advice.  Here are the particulars for my situation:

Property includes a duplex (we live in one unit and rent the other), commercial building/restaurant, waterfront house, Chalet and six cabins.  Purchased property 5 years ago for $850k, have claimed $30k depreciation to this point, invested $250k in basis eligible capital improvements.  Tax basis I'm calculating is $1.070m.  Soft offer from buyer for $2m with terms of seller finance; 500k down, 5% interest only payments for 5 years then balloon payment of 1.5m.  

Questions:

1.  Since we inhabited only the one half of duplex, how does that effect the capital gains relief of $500k for married taxpayers?

2.  Would $500k downpayment be taxable if used to pay off existing mortgage on property?

3. What would tax burden be year 1 without 1031 exchange?

4.  Is the 1031 exchange possible if I purchase a $500k property within the required deadline?

Thanks in advance.

[Bill B.]

You don’t get 1/2 of the gain tax free because you live in 1/2 of one of the 10 buildings you say are on the property. If every building is worth the same, and the land isn’t worth more than the buildings, then it sounds like 1/20th of your gain is a primary home sale and tax exempt.

You’re going to lose out on any chance for a 1031 if you take installments. The day you sell you are selling a 2mil property and have 45 days to identify your replacement and 135 more days to buy it. You’re probably facing a 200-250k federal tax hit plus the $7500 in depreciation recapture, plus the state income tax. 

So, unless this person is overpaying by at least $200k you should find a regular buyer if you want to do a 1031. If you’re not excited about doing a 1031 you at least spread out the tax burden with this buyer.