Can a mixed-use commercial property qualify as primary residence for capital gains tax exclusion?

5 Thank you for the response! So if I understand correctly, I'd need to somehow split the gain between personal and business use? How exactly would I calculate this? Would I need to get an appraisal that specifically values each portion separately?

12 Yes, you'll need to allocate the gain between personal and business use. There are a few accepted methods for doing this. Square footage is the most common and straightforward - if 40% of your total square footage was your living space, then 40% of the gain could potentially qualify for the exclusion. You don't necessarily need a separate appraisal, but good documentation of how the space was divided would be helpful. Photos, floor plans, or business records showing the distinction between spaces would strengthen your position if questioned. Also, keep in mind that if you claimed depreciation on the residential portion (which you shouldn't have if it was truly personal use), that would need to be recaptured regardless of the exclusion.

3 Did you have to provide floor plans to them? My property was pretty irregular with the living space kind of sprawling through parts of the building, so I'm not sure how to clearly document what was residential vs commercial.

17 I'm a bit skeptical - how does the service actually determine what parts were used for what purpose? IRS is pretty strict about documentation for mixed-use properties, especially converting commercial to residential. Did they help with recapture calculations too?

8 You don't need formal floor plans, just photos of the spaces and a rough sketch worked fine for me. They have a guided interview that helps you document everything properly - I just took photos of each area and marked them as business or personal use, then provided my best estimate of square footage. For recapture calculations, that was actually where they really helped me. Their system automatically traced through all my past tax returns to identify exactly what depreciation I'd claimed and calculated the recapture amounts correctly. They even spotted that I had been incorrectly depreciating part of my personal space in years 2 and 3, and they helped me figure out how to handle that properly.

9 Wait how is this even possible? I thought the IRS phone system was completely automated. How does this service actually work? Seems too good to be true.

17 Sorry but this sounds sketchy. The IRS barely answers their own phones - no way some third party service has a magic backdoor. And even if you get through, the phone agents give incorrect info ALL THE TIME. I'd trust a qualified CPA over a random IRS phone rep any day.

22 It's not a backdoor or anything shady - they use a combination of automated systems that navigate the IRS phone tree and wait on hold for you. When a representative is about to pick up, their system calls you and connects you directly. It's basically just an automated hold service. As for the quality of advice, you're right that not all IRS agents have specialized knowledge. But when I used the service, I was able to request to speak with someone in the property division. The agent I spoke with walked me through the exact forms I needed and the proper way to document my mixed-use situation. Way more helpful than the generic advice I was getting elsewhere.

1 Thanks for bringing that up! I have been claiming depreciation on the business portion but not on my living quarters. Would the recapture only apply to the business part? Also, does the recapture get calculated before or after I figure out the capital gains exclusion on the residential portion?

14 The depreciation recapture would only apply to the portion of the property that you've been depreciating, which sounds like just the business portion in your case. That's good practice - you definitely shouldn't have been depreciating your personal living space. The calculations are handled separately. For the business portion: you'll calculate your gain, including the recapture of all depreciation taken (which is taxed at 25%). For the residential portion: you'll calculate your capital gain and then apply the Section 121 exclusion if you qualify. They're essentially treated as two separate transactions for tax purposes, even though it's a single property sale.

19 This is actually a good point. I had a friend who tried to claim the exclusion on a workshop with a living area and got audited. The IRS wanted proof it was really set up as a residence - like did it have a full kitchen, bathroom, bedroom, etc. They also looked at whether utilities were separated.

That's really helpful documentation advice! I'm realizing I should probably gather all that proof now while I'm preparing for the sale. Did you keep any records showing the clear separation between your business and residential areas? I'm wondering if having photos of the distinct spaces with timestamps would help establish that the living portion was genuinely set up as a home rather than just occasionally used for sleeping.

Absolutely! Timestamped photos are smart thinking. I took photos showing my kitchen with personal items (my coffee maker, dishes, food in the fridge), my bedroom set up with personal belongings, and my home office area that was clearly separate from the business workspace. I also kept lease agreements for any business equipment that showed it was confined to specific areas, and utility bills that showed residential-level usage patterns (higher evening/weekend usage for the living areas). The key is showing it wasn't just a crash pad but a real home where you conducted your daily life.

This is excellent advice about the timing documentation! I'm actually dealing with a similar situation right now and hadn't considered how important it would be to prove exactly when my residential conversion was complete. Do you know if the IRS has any specific guidelines about what constitutes "completion" of a residential conversion? I'm wondering if they'd accept something like a certificate of occupancy for the residential portion, or if they typically want to see utility hookups, final inspections, etc. My concern is that I did the renovation in phases over several months, so pinpointing an exact "move-in ready" date might be tricky. Also, you mentioned not using residential space for business purposes - does this mean even having a home office in the residential portion could complicate things?

Great questions about the timing and completion criteria! From my experience helping clients with similar situations, the IRS doesn't have one rigid definition of "completion" - they look at when the space became functionally habitable as a residence. Certificate of occupancy is gold standard documentation if you have it, but many mixed-use conversions don't require separate residential CO's. The IRS typically accepts a combination of evidence: utility connections for residential use (separate meters if applicable), completion of essential living amenities (full kitchen, bathroom, proper heating/cooling), and evidence you actually began living there full-time (mail delivery, voter registration, etc.). For phased renovations, document each major milestone with photos and receipts. The "move-in" date doesn't have to be when everything was perfect - just when it became your actual primary residence where you slept, cooked, and lived daily. Regarding home office in residential space: this is nuanced. A legitimate home office used exclusively for business would need to be allocated as business use, potentially reducing your residential percentage. However, if it's just a desk where you occasionally handled personal finances or paid bills, that's typically considered personal use. The key is "exclusive business use" - if the space served dual purposes, it generally stays in the residential category. The safest approach is to clearly delineate: business activities stayed in the designated commercial area, personal life happened in the residential area, with minimal crossover.

This is such an important point about the expense allocation! I hadn't thought about how claiming business deductions on utilities could contradict a residential use claim. I'm curious - if someone did mistakenly claim full business deductions on utilities while living there, is there a way to correct this retroactively? Would you need to file amended returns for those years, or could you just adjust the calculations when determining the capital gains exclusion percentages? Also, the non-qualifying use rules you mentioned are really concerning. If I had a friend stay in my residential area for a few weeks and they paid me some rent money, would that count as non-qualifying use? I'm starting to realize there might be more complexity here than I initially thought.