Like kind exchange for duplex & live in it?

[KJ Judd]

A client is contemplating a like kind exchange. If she gives up a rental house & purchase a duplex, this would qualify as like kind. What happens if she lives in one side of the duplex? Does that disqualify it?

The exclusion rules for sale of a home specify that if the residence & nonresidence portion are within the same dwelling unit, no allocation of gain between the two are necessary. So in at least some situations the IRS considers a duplex a special situation.

Has anyone encountered this?

[solomon]

A client is contemplating a like kind exchange. If she gives up a rental house & purchase a duplex, this would qualify as like kind. What happens if she lives in one side of the duplex? Does that disqualify it?

The exclusion rules for sale of a home specify that if the residence & nonresidence portion are within the same dwelling unit, no allocation of gain between the two are necessary. So in at least some situations the IRS considers a duplex a special situation.

Has anyone encountered this?

I don't think a duplex would be considered a residence and non-residence within the same dwelling unit.

Each duplex by definition would be considered a dwelling unit. It would have it's own separate utility meter, entrance, etc. and probably billed separately for the taxes. Consequently, I don't see why the rental portion would not qualify for the 1031.

[BHoffman]

I haven't directly encountered this, but believe the following:

Gain from the sale of her home, if she qualifies, would fall under the Sec 121 exclusion.

The purchase price of the duplex, if identical units, would be split into 1/2. The 1/2 she intends to rent would qualify for 1031 exchange (subject to proper procedures) for deferring gain on her sold rental. The other 1/2 of the price would be the purchase of her personal residence and would be used to establish that basis. If the units are not identical, you would need to discuss the allocation of basis with her. It would be important to keep copies of sale and purchase documents and your allocation worksheets should this come into question.

Which leads to another question....If we expect the capital gains rates to increase, should we be advising our clients to recognize gain earlier, is there an election to forego the 1031 on the exchange of these types of real estate capital assets. and would it be wise to accelerate the recognition of income nowadays? I believe the tax rates are going nowhere except UP.

[S T]

Posters

One of our posters is an Exchange Specialist, William L. Exeter. Maybe you could also private email him.

Hopefully the answer would be posted on the board so we could follow.

Sandy

[Davc]

The residence portion of the duplex would be boot, taxable to the extent of the gain on the rental.

[KJ Judd]

Dave do you have a cite for this?

[BHoffman]

HAL: I'm sorry Dave, I'm afraid I can't do that. 2001: A Space Odyssey

Oh, I think Dave is correct. See IRC Sec 1031.

Is the boot is calculated like this?

Boot = FMV of relinquished rental property - 1/2 purchase price of duplex - 1/2 exchange expenses.

So, if for example:

Rental basis = $50k

FMV of relinquished rental = $450k

1/2 purch price of duplex = $300

1/2 exchange expenses = $15

Then would the boot be 450 - 300 - 15 = 135k?

Gain = 450 - 50 = 400k
Recognized gain would be 135k?

Proceeds from the sale of the residence would be excluded? Basis of the new residence would be 1/2 duplex purch price + 1/2 exchange expenses?

[Davc]

The OP doesn't mention a residence being sold. But the rest of the example is correct.