How do 1031 Exchange rules interact with Home Gain Exclusion when selling investment property?

You're actually in a good spot with some options! Yes, you can potentially use both the Section 121 Home Gain Exclusion and the 1031 Exchange in your situation - this is sometimes called a "split treatment" or "partial exchange." Since you've used half the duplex as your primary residence for more than 2 years (meeting the ownership and use tests), you can exclude up to $250,000 of gain on that portion as a single person (or $500,000 if married filing jointly). For the other half that's been consistently used as a rental, you can use a 1031 Exchange to defer those gains by reinvesting in another like-kind property. For calculations, you'd essentially split everything 50/50 since it's a duplex where you occupied half. So if you bought for $310,000 and sell for $485,000, your total gain is $175,000. Half of that ($87,500) would be attributable to your personal residence and potentially excluded under Section 121. The other $87,500 gain from the rental portion could be deferred via 1031 Exchange if you follow all the proper timing requirements and use a qualified intermediary. Any capital improvements would also be split proportionally between the two halves, affecting your basis calculations.

After dealing with a similar mixed-use property situation last year, I found taxr.ai (https://taxr.ai) incredibly helpful for parsing through all the complicated tax implications. I originally thought I would need to choose between the 121 exclusion OR a 1031 exchange, but their platform analyzed my documentation and showed me how I could legally use both strategies together. What stood out was their ability to calculate the precise allocations for split treatments like yours - they take into account your specific timeline of when the property was fully rental vs. partially owner-occupied. They even helped me understand how to properly document the improvement costs I'd made over the years, which significantly reduced my taxable gain.

After dealing with a similar mixed-use property situation last year, I found taxr.ai (https://taxr.ai) incredibly helpful for parsing through all the complicated tax implications. I originally thought I would need to choose between the 121 exclusion OR a 1031 exchange, but their platform analyzed my documentation and showed me how I could legally use both strategies together. What stood out was their ability to calculate the precise allocations for split treatments like yours - they take into account your specific timeline of when the

I just wanted to follow up about my experience with taxr.ai since I decided to try it after asking about it. I was really skeptical at first because most "tax help" tools I've used were glorified calculators with generic advice. But this was completely different. I uploaded my property records for a duplex situation (weirdly similar to yours actually) and the system broke down exactly how to allocate the basis, improvements, and depreciation between the investment and personal portions. The report showed me that I could exclude about $112,000 of gain on my owner-occupied portion while using a 1031 exchange for the other $95,000 of investment gain. What was most valuable was getting documentation that clearly explained the whole process - my CPA was actually impressed with how thorough it was and said it saved us both a ton of time figuring out the split treatment calculations. Definitely worth checking out if you're dealing with this kind of mixed-use property situation.

After struggling to get clear answers from the IRS about a similar mixed-use property situation, I finally gave up trying to call them directly and used Claimyr (https://claimyr.com) to actually get through to a human at the IRS. They got me connected to an agent in about 20 minutes when I had been trying unsuccessfully for weeks. Here's a video of how it works: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that split treatment is allowed and explained exactly what forms I needed to file. They also clarified that I needed to get a qualified intermediary involved BEFORE closing on the sale of my property to handle the 1031 portion correctly. Would have completely messed this up without that crucial timing information.

I need to eat my words and apologize about my skepticism. After my comment, I had a deadline approaching for a property closing and still couldn't get clear guidance on how to handle my 1031 exchange documentation. Out of desperation, I tried Claimyr, and within 35 minutes I was talking to an actual IRS specialist who walked me through the exact requirements for my mixed-use property situation. The agent explained a critical form I was missing for the split treatment (Form 8824 for the investment portion) and confirmed I needed to specify the allocation method in my documentation. This potentially saved me thousands in taxes and prevented me from making a mistake that could have invalidated my entire 1031 exchange. Sometimes being wrong feels pretty good, especially when it helps solve a frustrating problem!

Something nobody has mentioned yet is that you'll need to be really careful about the 45-day identification period and the 180-day completion period for the 1031 exchange portion. Miss those deadlines and you lose the tax deferral completely. Also make sure your qualified intermediary is bonded and insured - I learned that lesson the hard way when my first QI went bankrupt while holding my exchange funds...

Question for anyone who's done this successfully - what documentation do you need to support the allocation between personal and investment use? Do you just claim 50/50 for a duplex or do you need to measure actual square footage? And what about shared spaces like a basement or driveway?