Cost Segregation and no cap gains

[Zachary Gray]

looking to purchase a duplex to live in one unit and rent out the other in the greater Boston area. I intend to live there for 2 years and then rent it for 3. Having lived in it for 2 of the last 5 years i would be exempt from capital gains upon sale, negating the need for 1031. If I improve the quality of the unit and do cost segregation for bonus depreciation upon purchase, I gain the benefit of the larger tax write off in the short term and still pay no cap gain taxes upon sale at the end of the 5 years. Just wanted to determine if this is allowed? 

[Lien Vuong]

You would only be able to roughly 50% of your duplex written off in the owner occupied exemption because it's a 2F assuming that they're split even steven. What you're going to have to do after is 1031 exchange the profit of the other side into another income producing property. You're perfectly allowed to do CS but all the bonus depreciation and write off will need to be recaptured and cannot be carried with you in a 1031x and you must pay that amount in the Year 5 that you sell the property. This makes the CS fees and process futile and not effective. 

In order for you to completely walk away from the tax free exemption you'd live in Side A Year 1-2 and Side B 3-4 and sell the property in Year 5. 

That's the scenario in a perfect world.