Will I owe capital gains tax on this sale?

[Jack B.]

I have lived in my single family house for a little over 2 years. I rented the apartment above the garage out for 1 year. I was thinking of 1031 exchanging 20% of the proceeds from the sale (20% because that is how much of the house was rented) but am curious to know if I will owe capital gains tax on a portion of the remaining proceeds since I didn't occupy the whole house for 2 years. If so, what percentage of the proceeds for the primary residence portion would be taxed?

Also, what can I do if there is a huge tax penalty to offset this?

[Ashish Acharya]

Do you mean you rented one of the room within the single-family house?  If yes, 

1) You do not have to exclude the portion of the house for the capital gain. Entire gain is qualified for the capital gain exclusion. You have to exclude the gain only if the rented space was separate dwelling unit ( duplex). If you rented a bedroom out of the house, you qualify for entire sale exclusion.

2) You will qualify for 250k exclusion if you are single. 

3) However, you have to recapture the depreciation you took on the rental portion of the house. This is the depreciation you have taken so far time 25%.

So, the only tax you will pay is Deprecation * 25%.

good luck.