1031 exchange clarification

[Leta Eydelberg]

We are preparing to do our first 1031 exchange in the next couple of months. We read all the standard descriptions and begin to get clearer picture, but have an additional complication and are not sure how it changes the picture.

In 2015 we bought a triplex. We moved into one unit and rented two others for 2 years. After that we moved out and rented the unit we lived in for another 2+ years. Now we are selling this investment property and trying to figure out how to proceed with 1031. If I understand correctly, we can have a third of the gain excluded from the capital gains taxes since we lived there for 2 years? Then what does it mean for 1031? Can we exchange only 2/3 of the property?

We don't have CPA yet and when we tried to consult couple of CPAs recommended to us, it was clear they have not dealt with investments and were not sure what to say, so we are not comfortable hiring them.

Any clarification would be greatly appreciated!

[Dave Foster]

@Leta Eydelberg You're spot on.  Because you purchased this as a mixed property (primary and investment) you can use the appropriate tax mitigation technique for each side.  For your primary side all you need do is have lived in the property for 2 out of the 5 years immediately prior to sale.  Check - you get 1/3rd of your gain tax free.

Meanwhile 2/3rds of that property has been used as investment.   It's been reported on your schedule E as investment and depreciated as investment.  So it is eligible for a 1031 exchange.

At the closing you will be taking an amount of cash equal to the amount of proceeds allocated to the primary residence sale (1/3rd and you'll be 1031ing the proceeds allocated to the investment (2/3rds).  

Your reinvestment requirements will be to purchase at least as much as your sale (2/3rds of the total sale) and use all of the proceeds from the sale of the investment side (2/3rds of the proceeds) in the purchase of your next investment property.