Selling two family, capital gains advice and multiple properties

[Michelle Costello]

I am selling my two family home in Boston, MA. I will make about 200k off this sale. I lived in the home for 5 years and rented the second half out. Am I entitled to exemption on the whole property? If not, can I use my profit to purchase two single family homes instead of one large two family? One single family will be my primary residence... the other will be rented out. Please help I’m so confused!

[Dave Foster]

@Michelle Costello, congratulations you've hit the jackpot. What you have is a mixed use property that will allow you to take part of that gain tax free and the rest will be tax deferred.

Since you've lived in part for 2 out of the last 5 years you can take the amount of profit allocated to that part tax free.

Since you've used the other part of the property for investment it qualifies for a 1031 exchange.  

The money you get from the sale of primary residence portion is tax free and you don't have to reinvest it at all.  You can purchase a new property with it if you want but you don't have to.

The portion allocated to the investment cab be put into the 1031.  In order to defer all tax you must purchase at least as much investment real estate as you sell.  When using the 1031 

1.  You can use the 1031 to purchase one large two family as long as the investment portion is equal to or greater than the investment portion you sold.

2. You can  purchase two properties as long as they are intended to be used for investment (you cannot 1031 into a new primary residence immediately)

If you want to use the 1031 to purchase two properties and move into one of them you'll need to first use it for investment for a year or two.  Then you can move in and convert the investment property into your primary residence.  Meanwhile the tax free portion from the primary sale is ....tax free.

It is confusing.  But that's why it's not DIY.  But its also a great opportunity for you!!