Can I avoid capital gains tax on commercial property I lived in as my primary residence?

14 So if I've been taking deductions for 60% of the property as business use, does that mean I can only apply the capital gains exclusion to 40% of the profit? Also, does it matter that the entire property is zoned commercial rather than residential?

8 Yes, if you've been taking business deductions for 60% of the property, the capital gains exclusion would generally only apply to the 40% you used as your residence. That's exactly how the allocation works. The zoning classification itself doesn't automatically disqualify you from the primary residence exclusion. The IRS is more concerned with how you actually used the property and how you've treated it on your tax returns than with local zoning laws. What matters most is that you genuinely used a portion as your main home for the required time period and properly documented this mixed use.

17 How accurate was their analysis? I'm wondering because my situation is a bit unusual with a commercial building that I partially converted to living space, and I'm not sure standard tax software handles these edge cases well.

20 Did the tool actually help with the specific allocation calculations? My accountant seems confused about how to properly divide the basis and calculate the business vs. residential portions for tax purposes.

12 The analysis was surprisingly accurate for my situation. They have specific options for unconventional living arrangements including mixed-use properties. What impressed me was that they flagged potential audit triggers based on my specific scenario and provided documentation templates tailored to my situation. The tool absolutely helped with allocation calculations. It walked me through determining the correct percentage split based on square footage, time used for each purpose, and even factored in common areas. It then calculated the adjusted basis for each portion and showed exactly how much would be subject to capital gains vs. depreciation recapture. My accountant was actually impressed with the detailed breakdown and used it for my final filing.

23 How does this actually work? Do they just call the IRS for you? Seems like something I could do myself without paying someone else.

19 Sounds like a scam to me. Why would anyone need a service to call the IRS? I've always managed to get through eventually, even if it takes several attempts.

6 It's not just calling the IRS for you. They have a system that navigates the complex IRS phone tree and waits in the queue for you, which can sometimes be 2-3 hours. When an agent is about to pick up, they connect you directly. So instead of being stuck on hold for hours, you just get a call when an agent is ready to talk. No, it's definitely not a scam. I was skeptical too until I tried it. The difference is that they know exactly which options to select to reach the right department for specific tax situations. When I tried calling myself, I kept getting transferred between departments or connected to agents who weren't familiar with mixed-use property sales. Through their service, I immediately got connected to someone who understood Section 121 exclusions for mixed-use properties and saved me thousands in unnecessary taxes.

15 I went through this last year. Unfortunately, you can't avoid depreciation recapture on the business portion. I had claimed about $45,000 in depreciation over 5 years on my business portion, and had to pay 25% tax on that amount regardless of the capital gains exclusion on the residential part. It was a nasty surprise.

7 Thanks for sharing your experience. That's exactly what I was afraid of - I've claimed around $58,000 in depreciation on the business portion over the past 4 years. Sounds like I need to budget for paying about $14,500 in recapture tax even if I can exclude the capital gains on my living quarters. Definitely changes my calculations for whether it makes sense to sell now.

16 Good point! Texas doesn't have income tax so I almost forgot about this factor. What percentage did California charge you on the gains you thought were excluded?

California hit me with their standard capital gains rate, which is taxed as ordinary income. Since I was in the higher brackets, I ended up paying about 9.3% state tax on gains I thought were completely excluded. It was roughly $8,000 more than I had budgeted for. Definitely factor in your state's treatment when calculating the real tax impact of your sale.

This is really helpful advice! I'm curious about the documentation requirements you mentioned. Since I converted a commercial building into living quarters, would things like building permits for the residential conversion help establish that it was genuinely my primary residence? Also, how strict is the IRS about the "primary residence" test when the property is zoned commercial but actually used as a home?

Building permits for residential conversion would absolutely strengthen your case! That's exactly the type of documentation the IRS looks for to establish legitimate residential use of a commercial property. You should also gather utility bills showing separate meters or higher usage patterns consistent with full-time residence, any insurance policies that covered it as your homestead, and records of where you received mail and registered to vote. Regarding the zoning issue - the IRS focuses on actual use rather than zoning classification. IRC Section 121 doesn't disqualify properties based on commercial zoning if they were genuinely used as your main home. However, you'll need to demonstrate that the residential portion was separate and distinct from any business use. The key is showing you had exclusive residential areas (bedroom, kitchen, living spaces) that weren't used for business purposes. Keep detailed floor plans showing the residential vs business areas, and be prepared to explain how you maintained the separation between personal and business use of the property.