Tax Advice - Section 121 Exclusion for Duplex Sale

Minneapolis, Minnesota
Tax, SDIRAs & Cost Segregation
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Tax Advice - Section 121 Exclusion for Duplex Sale

Jacob McInerney
Minneapolis, MN · Member since 2016 · 4 posts · 1 vote

Hey folks,

I'm looking into putting a duplex on the market.

Concerning the Section 121 exclusion (https://www.irs.gov/taxtopics/tc701) for the sale:

The property was my primary residence (househack) for 3 out of the last 5 years (the exclusion requires 2 years). Both units have been rented the last 2 years.

Are there any tax code "gotchas" that would prevent me from qualifying for the exclusion?

Really appreciate any and all advice - thanks!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y

@Jacob McInerney You can still qualify for the 121 exclusion if you meet that two-out-of-five-year requirement for the side you lived in.

However, since you also demonstrated investment use on the other portion of the property, you could qualify for a 1031 exchange, which would allow you to defer the tax on the rest of the property that was held for investment use as well.

Again this amount would be the unit that was rented, but you could receive a bit of cash tax-free and defer whatever leftover tax you might have. No tax at all. Some tax free and some tax deferred. That is a great thing about the small multifamily house hack!!!

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    1y
    Quote from @Jacob McInerney:

    Hey folks,

    I'm looking into putting a duplex on the market.

    Concerning the Section 121 exclusion (https://www.irs.gov/taxtopics/tc701) for the sale:

    The property was my primary residence (househack) for 3 out of the last 5 years (the exclusion requires 2 years). Both units have been rented the last 2 years.

    Are there any tax code "gotchas" that would prevent me from qualifying for the exclusion?

    Really appreciate any and all advice - thanks!


    You will have to treat it as two properties. Your former unit is most likely eligible for the exclusion. The other unit is not eligible.

    1Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 899 votes
    1y

    Hey Jacob, sounds like you’ve done your homework — that’s great. If you lived in one unit as your primary for 2 of the last 5 years, you may qualify for the Section 121 exclusion on the portion you lived in.

    Based on what you shared, here are a couple of “gotchas” to watch out for:

    1. Use Test & Ownership Test – You need to have owned and lived in the property as your primary residence for at least 2 out of the last 5 years before the sale. Sounds like you meet that, but double-check the exact dates.

    2. Rental Period & Depreciation – The time it was rented doesn’t disqualify you, but any depreciation you took on the rented portion has to be recaptured (taxed) when you sell. Also, the exclusion only applies to the portion you lived in, not the entire duplex.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Jacob McInerney You can still qualify for the 121 exclusion if you meet that two-out-of-five-year requirement for the side you lived in.

    However, since you also demonstrated investment use on the other portion of the property, you could qualify for a 1031 exchange, which would allow you to defer the tax on the rest of the property that was held for investment use as well.

    Again this amount would be the unit that was rented, but you could receive a bit of cash tax-free and defer whatever leftover tax you might have. No tax at all. Some tax free and some tax deferred. That is a great thing about the small multifamily house hack!!!

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
    • Michael PlaksPro Member
      Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
      1y
      Quote from @Dave Foster:

      @Jacob McInerney You can still qualify for the 121 exclusion if you meet that two-out-of-five-year requirement for the side you lived in.

      However, since you also demonstrated investment use on the other portion of the property, you could qualify for a 1031 exchange, which would allow you to defer the tax on the rest of the property that was held for investment use as well.

      Again this amount would be the unit that was rented, but you could receive a bit of cash tax-free and defer whatever leftover tax you might have. No tax at all. Some tax free and some tax deferred. That is a great thing about the small multifamily house hack!!!


      Before considering a 1031 exchange for the rental side of the duplex and writing my buddy Dave a check, have an accountant figure out how much tax hit you are looking at. Often that tax hit is not as scary as people imagine. It may not even be worth the hassle of 1031 (and dealing with Dave).  ;)

      PS. But otherwise - a great point from Dave.

      1Reply
  • Jacob McInerney
    OP
    Minneapolis, MN · Member since 2016 · 4 posts · 1 vote
    1y

    Thanks for the info, guys - really appreciate it!

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