Duplex - Live in Flip

[Jaren Woeppel]

Hello BP Community!

I had a question about a live-in flip pertaining to a duplex. This is going to be kind of "off the cuff" so if there are some inaccuracies, please let me know.

Alright, so the beauty behind a live-in flip is that it is your primary residence and I believe if you have lived in it as your primary residence for 2 of the last 5 years, you are able to sell the property, up to a certain limit, without capital gains tax.

If you lived in one side of a duplex and rented out the other, I believe the same rules apply but you would only be able to take advantage of half of the benefit because only half was your primary residence.

My question is, is it possible (legal) to live in one side for 2 years and fix that side up, move to the other side for 2 years and fix it up, then sell the duplex within a year so you would still have each side your primary residence for 2 of the last 5 years and be able to capture both sides as a primary residence exemption?!?

I've never heard of that being a strategy and I am assuming the BP community has thought of this before. I would like some feedback as to why or why not this would be an acceptable tactic.

Thanks!

[Dave Foster]

@Jaren Woeppel and @Breon Harding, actually there's a very clear set of regs for this type of strategy.  You're absolutely correct that if you have lived in 1/2 of the duplex for 2 out of the 5 years prior to sale you would be able to take the first $250K ($500K if married) of profit allocated to that half tax free.  

But on the other half, unless you have just left it vacant and not rented it or depreciated it or treated it like an investment at all when you move in you would be "converting" a property from investment into your primary residence.  when you do that you are not able to get the full $250/$500K exemption.  you must still live in that unit for 2 out of the 5 years prior to sale.  But you will only get a proration from the time used as a residence (qualified use) and the time used as investment (non-qualified use).  And you would still have to recapture depreciation.

It can be tempting to try to do that.  But the time frame needed to get the partial savings usually doesn't make sense.  So what most house hacking investors will do is to sell the duplex and take 50% of the profit tax free and do a 1031 exchange on the other half rather than move for two more years into the other side.  Yes, the 1031 is only tax deferred but it keeps your investments growing and the deferral can be for as long as you want.

The combination 121/1031 sale is a great strategy for small MF properties.