Can I 1031 exchange house hack for 1031 exchange?

Question

Hi

My question is it possible to 1031 exchange my home that has a downstairs rental and receive the tax benefits? And, also can I claim the $250k exclusion since I live there as well?  Would like to sell my home, but Im in CA and I will get beat down by taxes & am looking for was to defer.  Thanks kindly!  Gayle

Bill Exeter · Answer

Hi @Gayle Eisner

I assume that your home is a SFR. We refer to this as a split use property and you would qualify for both the Section 121 Exclusion ($250,000) as long as you can say that you have owned and lived in the property as your primary residence for at least 2 out of the last 5 years and a 1031 Exchange as long as you have rented it long enough to document intent to rent (probably 1 year - or more - straddling two income tax years - or more).

Generally, your tax advisor will allocate the sale price, taxable gain, etc., between your primary residence usage and your rental property usage on a prorata basis using square footage. The amount of taxable gain allocated to your primary residence portion would be tax free up to $250,000 and the rest would be taxable.  The amount of taxable gain allocated to your rental property portion would be tax deferred if you structured a 1031 Exchange.