Recently, we had a client who was looking to do a 1031 exchange on a duplex that they owned. The property was worth roughly $300k, the taxpayer owned $190k and had lived in the upstairs portion of the duplex for 2 of last 5 years. The first question the client had was how to determine the amount of net proceeds he needed to put into the new replacement property?
Half of the Net Proceeds
Assuming that the property is treated as a 50/50 duplex on your prior tax return, half of the net proceeds will go into the 1031 exchange to buy new real estate worth about $150K (maybe a little less due to ½ of transaction costs).
Paying Down Personal Debt
The client also wanted to use the half of the net proceeds that had no capital gains to pay down some personal debt. Here’s the second big question: how much does he need to spend on replacement property to avoid paying taxes on the part that is susceptible to capital gains? Or since the client lived in the property, is the entire thing exempt from capital gains taxes?
Section 121 Exclusion
If you qualify for the Section 121 Exclusion of gain from sale of a principal residence for the portion that you lived in, then you can take half the net proceeds and do whatever you want with that portion.
It’s also important to double-check all of this with your own CPA or accountant.
· 1031 Hotline: If you have questions about principal residence exclusions and 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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