COMBINING INVESTMENT & PERSONAL USAGE
George Christofely
1031 EXCHANGE SPECIALISTS, INC., Founder & President. A National 1031 Qualified Intermediary. Call: 877-513-1031
A multi-unit or single structure with concurrent investment and personal use may be afforded tax savings upon sale under both Sections 1031 and 121 (Primary Home Exclusion) by allocating the gain based on the relative size of each unit.
A single structure with consecutive investment and personal use may have significant tax savings or minimal tax savings upon sale depending on the order and time frame of usage, as follows:
A property first utilized as a primary residence and then converted to investment use can exclude up to $500,000 ($250,000 if single) of gain if the primary home usage occurred in 2 of the last 5 years. If the total gain on the sale exceeds $500,000 ($250,000 if single), the excluded amount of $500,000 ($250,000) is deducted from the net sales price after selling expenses and the remainder can be deferred into another investment property via a 1031 exchange, hence avoiding all taxes. The safe harbor period of investment use to qualify for a 1031 exchange is the 24 months prior to the sale date.
On the other hand, a property first utilized as an investment/vacation property and then converted to a primary home will not be eligible for a 1031 exchange and will be limited to the amount of excluded gain under Section 121 upon sale. Under the Revenue Act of 2008, an investment/vacation property converted to a primary home is subject to an allocation of gain based on qualified and non-qualified periods. The qualified periods are those periods during primary home usage and those periods preceding the Revenue Act. The non-qualified periods are those periods during investment/vacation usage. In addition, depreciation deductions taken during the investment periods are recaptured upon sale at a federal tax rate of 25 percent and cannot be excluded under the primary home exclusionary amount.
When considering property usage in long-term goals, albeit retirement, investment, vacation, principal residence, it is important to understand the tax implications of the usage and the time frames required to maximize the tax savings.