Tax Implications of Sale of Multi-Family (Primary Residence?)

[Patrick Hartnett]

I made my first real estate investment roughly 5 years ago, purchasing a 2-Family as my primary residence...living in 1st Floor Unit with my wife and we renting out the 2nd Floor Unit to tenants.

We're about to sell the house at a profit and I'm looking to understand what the tax implications will be.

I'd read that a married couple are allowed to exclude up to $500,000 in profit from a sale of their "primary residence".  However, I'm not sure if my multi-family can be considered a primary residence?

Or would I need to consider a 1031 Exchange to defer taxes?

I'm of the opinion that the housing market is bound to crash again in the near future, and would love to have cash on hand to take advantage of future opportunities so I might forego the 1031 Exchange anyway...but looking for any guidance anyone can provide!  Thanks

[Dave Foster]

@Patrick Hartnett, Excellent analysis by@Basit Siddiqi and @Frank Chin.  What you've got is a golden opportunity to take some cash tax free and defer the rest of the gain inside the 1031.  An additional consideration is that you've also got depreciation recapture on the investment portion and that too will be deferred in the 1031.

Getting half the gain tax free gets you out of harms way a little bit.  You could go into another house hack.  As long as the investment portion of the new property is more than the portion of the property you sell in the 1031 you will not only defer all tax but also be able to move into the other half as your new primary.  This frees up the tax free gain to be used when you see opportunity.