Section 1031 and 121 Hybrid

[Cody Anderson]

I recently learned that if you owner occupy a residence for part of the 5 previous years before sale, and you rent it for the remaining time, you can calculate the percentage of time the property was owner-occupied (and thus qualifies for the sec. 121 primary sales tax exemption of up to $250k for single filers) vs the time it was being rented (which qualifies for 1031 exchange) and claim both benefits. 

https://hcsequity.com/blog/combining-1031-exchange-with-121-....

How does this work for a multi-family?

[Dave Foster]

@Cody Anderson, actually it's better than that.  If you buy a property as your primary residence and live in it for 2 years then rent it for up to 3 more (so you've still lived in it for 2 out of the 5 years prior to sale) you would get the entire 121 exemption tax free.  You would only have to recapture depreciation.

If you have more than $250K of gain ($500K if married) then you could do the same thing and take the $250K tax free.  And you could also do a 1031 exchange on the rest.  This would also avoid depreciation recapture.  In essence you get some gain tax free.  and the rest of the gain is tax deferred in the 1031.  

The reverse process of converting an investment property into a primary residence also has some similar benefits of converting taxed gain into tax free gain.  We've got some videos up on this subject and a chapter in my book speaks to it.  It's an awesome opportunity both ways to eliminate tax on real estate gain.