Taxes Paid on Sale of Property

@Logan Weber,

Imagine your 4‑unit building is like a big house with four bedrooms, but each bedroom is its own mini‑apartment. You lived in one bedroom and rented out the other three. Later, you rented out all four.

When you sell the building, the IRS basically says: “Okay, which part was your home and which part was your business?”

Only the part you lived in gets the special home‑sale tax break. Since you lived in 1 out of 4 units, only about 25% of the profit gets that break. The other 75% is treated like you sold a rental property, so you pay taxes on that part. If you want to dig deeper into how the IRS splits things, you could explore allocation rules.

Next, the IRS looks at when you lived there. Any time after 2008 when you weren’t living in your unit counts as “nonqualified use,” which means that part of the profit can’t get the home‑sale break. But there’s a nice exception: once you move out, the time after you move out doesn’t hurt you as long as you sell within the 5‑year window. You can explore nonqualified use.

Then there’s depreciation recapture. When you rent out property, you get a tax break by saying the building is wearing out. When you sell, the IRS says, “Cool, but now you owe us back the tax break we gave you.” That’s depreciation recapture, and it’s taxed up to 25%. You can explore depreciation recapture.

Finally, once you turned the whole place into an STR/mid‑term rental, it stopped being your home. But if you lived there for 2 out of the last 5 years, you can still get the home‑sale break on the part you lived in. The rental parts stay taxable. You can explore the 2‑out‑of‑5 rule.

So, depending on when was the last time you actually lived there, you may have some, or none for exclusion of tax.  

Think seriously about a 1031.  Good luck!