1031 Exchange Scenario - Purchase a Duplex Live in one side?

Question

Hi Folks,

I'm afraid that I'm going to be paying some Cap gains this year on a property I've had rented for a few years.  I used to live there, but I have rented it for too long.

Would it be possible to 1031 and purchase a duplex, but live in one side.   One side for tax purposes would be rental property.  Has anyone lived in one side of a duplex.  How did you treat the property on your taxes?

Thanks!

Bill Exeter · Answer

Hi Darla,

Yes, it is possible as long as the value of the portion that is held as rental property is equal to or greater than the value of the property that you are selling.  For example, if you sell a rental property for $250,000 and then want to acquire a duplex so that you can rent one side and live in the other, the duplex would have to be valued at $500,000 so that half of the value - or $250,000 - is at least equal to the value of the rental property that you sold.

Going forward, the side that you live in will be your primary residence and the side that you rent out will be investment property for tax purposes.  When you sell in the future, the side that you live in will qualify for the 121 Exclusion ($250,000/$500,000 tax-free exclusion) and the side that you rent out will qualify for another exchange.

Darla Holtzclaw · Answer

Thanks @BillExeter.