What is the capital gain when 1031'ing out of a house hack?

[Jon Schwartz]

Hi gang!

I have a few questions regarding executing a 1031 while selling a house-hacked duplex. If you're a 1031 professional dispersing advice to attract clients, please have at it!

I'm going to simplify the numbers, but here's the deal:

Three years ago, I bought a duplex for $400K and put 25% down. I then spent $50K renovating the property. This year, I'll be able to sell it for $500K.

By my math, the total capital gain is $50K because the sale price is $500K and the cost basis is $450K. (Let's just set aside the cost of the sale, depreciation, etc.) Because half of the duplex was my primary residence, I can take half the capital gain, or $25K, tax-free because of the personal deduction. The remaining $25K is subject to capital-gains tax.

Am I correct so far?

Here's where I get confused: how much of the proceeds do I have to put into an up-leg to avoid paying tax on that $25K? At the time of sale, the outstanding loan balance will be about $280K, so my proceeds will be about $220K. I'm assuming that, since only half the duplex was considered an investment property, I only have to use half the proceeds to buy the up-leg. And likewise, the loan I have to take need only be for $140K, half the loan balance when I sell.

So am I correct that, to avoid capital gains tax on $25K, I need to put $110K down and take a loan for at least $140K on an up-leg property?

What happens if I buy an up-leg with $50K down and a $140K loan? Then I'd have $60K in boot, right? That's more boot than capital gains!

Somebody please clear this up for me!

Thanks so much!

Jon