6 Family to 2 Family - 1 Unit Owner Occupied - 1031

[Ariel Cohen]

I am working with a seller who is looking to sell her 6 family property that she is living in and purchase a 2 family house where she will occupy one of the units.

Assuming the 6 family property is sold for $1,500,000 and she purchases a 2 family house for $750,000 can she use a 1031 exchange to go from the 6 to the 2? 

If she agrees to seller finance part of the transaction to defer the taxes on the cash she would otherwise receive, can she use a combination of 1031, 121 & installment sale?

I am trying to help the seller with the best possible structure that would work for both of us.

Thanks.

[Dave Foster]

@Ariel Cohen and @Account Closed, Yes you may 1031 exchange from a more expensive property into a less expensive property but you will incur tax on the difference in price until you've reached the full amount of gain from the first property.

To your example.  Since 1/6 of the property is her residence then you could probably allocate $250,000 of the sale to her primary residence.  If she's lived in that property for 2 out of the last 5 years that money would be tax free. That makes the investment (1031) portion of her sale $1,250,000.  If she wants to do a 1031 exchange into a $750,000 she certainly can.  She would pay tax on all of her gain up to the $500K difference.  So if her gain on the sale of the 6 family was less than $500K then there would be no savings by doing the 1031.  But if the gain on the sale was say $750K then she would pay tax on the $500K difference but still shelter the tax on the remaining $250K of gain.

However in her case there's another gremlin out there and that is that she wants to live in half of the new property.  This would make only half of the purchase eligible for 1031 treatment.  She may want to think about buying a couple of properties to more completely mitigate the tax and give her the right valuations to complete her exchange.