Selling or 1031 Exchange? Denver duplex that was purchased as pri

[Shaun Callais]

My wife and I purchased a duplex in Denver last year. It was financed using a primary residence mortgage. We had to put $105k down to qualify, based on DTI. We lived in one side of the duplex for about 7 months, then a new job required us to move about 60 miles away, to another part of the state. We currently rent.

We are currently renting both sides of the duplex. One for $3k/month, the other for $2k/month. Our mortgage (PITI) is $2,300/month, total income is $5,000/month. We spent another $70k on updating the side we were living in. By finishing the basement, we doubled the square footage on our side.

We purchased the property for $550,000 and invested another $75k. Our mortgage balance is $443k. Assuming we were to sell the duplex for $850k, which is what comparable duplexes have recently sold for, we would have $407k - $51k realtor fees = $356,000. Since we have owned it for over a year, it’s possible we would have to pay 15% in long-term capital gains taxes, based on our income bracket. $350k - $175k original investment = $125,000 - 15% = $106,250 + $175k = $281,250 that we would walk away with. Is this correct?

Another option we are looking into is doing a 1031 exchange, but it would need to meet the needs of my family. We want to purchase a home in a Denver suburb about 8 miles away next summer to live closer to family and be in a better school district for our son, who is in special education and is experiencing increased behavioral challenges. We would look for a single family residence with a mother-in-law suite. We doubled the square footage of the duplex unit our family lived in from 874 to 1,750, and the side that has always been a rental is still 875 square feet.

I am also looking to move to another career, as I am currently in a commission-only sales job and have not made the amount of money I had anticipated, due to supply chain and payroll delays (needing to wait 4-6 months to get paid on my sales). I’m concerned that I won’t qualify for a $650k mortgage next summer without this job showing on 2 years of tax returns. Fortunately, our rental will show up on 2 years of tax returns, as $5k/month of rental income since August 2021, but only $2,400 of rental income in 2020, as the previous owner hadn’t raised rent since 2012. I have an MBA and should be able to find a job that pays $80-100k/year, with my experience.

Please advise on the best option(s) for our family, as well as if I am missing any key info needed to make this decision. If we kept the duplex, would the $5k in rent be enough to offset the $2,300/month mortgage, for DTI purposes? Assuming we only deduct PITI and depreciation from taxes, no repairs. Is the 1031 exchange from a duplex to a SFR with a mother in law suite realistic? If we kept the rental we would need to go through Penfed Credit Union, or another financial institution, to take out a HELOC on the duplex to use as a downpayment on a new house. Is there any way we can possibly avoid paying long-term capital gains taxes if we sell, besides through a 1031? Thank you!