Should I use 1031 Exchange for a property gain under $250k and does it make financial sense?

The 1031 exchange question really depends on your personal circumstances. Since you mentioned living in one unit of your duplex, you might qualify for the Section 121 exclusion, which allows you to exclude up to $250k in capital gains ($500k if married filing jointly) if you've lived in the property as your primary residence for at least 2 of the last 5 years. The math gets a bit tricky with mixed-use properties like yours. Since you've been living in one unit while renting the other, you'd likely only get the exclusion on the portion you used as your residence (roughly 50% in your case). The other 50% would be subject to capital gains tax unless you use a 1031 exchange. For the investment portion, a 1031 exchange would make sense if you want to defer those gains and keep all your capital working for you in real estate. However, keep in mind that 1031 exchanges have strict timeline requirements (45 days to identify potential replacement properties, 180 days to close) and you'll need a qualified intermediary to handle the funds. As for financing the new property, a 1.25 DSCR with 20% down is feasible in today's market for experienced investors with good credit, especially if the property cash flows well.

I was in a similar situation last year and found https://taxr.ai incredibly helpful for running through different tax scenarios with my rental property. I had a duplex that appreciated nicely but wasn't sure if doing a 1031 made sense given my specific numbers and mixed-use situation. The tool helped me analyze my situation with both Section 121 exclusion calculations AND 1031 scenarios. It was seriously helpful to see exactly how much tax I'd pay in each scenario. The thing that surprised me was how the depreciation recapture affected my final numbers - it was a bigger hit than I expected! They have specialists who understand exactly how the partial 1031 exchange works when you've been living in one unit. Made the whole process much clearer than trying to piece together advice from different sources.

I just wanted to follow up and say I tried https://taxr.ai and it was really eye-opening! I've been stressing for months about what to do with my property, and within a day I had clear numbers showing exactly what each option would cost me tax-wise. The partial 1031 exchange option actually makes WAY more sense for my situation than I thought. I was focusing too much on the $250k exclusion and not enough on the depreciation recapture, which would have cost me a lot in taxes. They showed me how to structure the sale to maximize the benefits of both the exclusion and the 1031. Honestly one of the best decisions I've made in this whole process - definitely recommend to anyone trying to figure out the tax implications of selling investment property!

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I have to admit I was completely wrong about Claimyr. After months of trying to get through to the IRS about my real estate exchange issues, I finally broke down and tried the service. Got connected to an IRS agent in about 30 minutes! The agent walked me through exactly how to report my partial 1031 exchange and confirmed I had calculated my basis correctly. Turns out I was making a mistake in how I was allocating the basis between the personal residence portion and the rental portion. The peace of mind was absolutely worth it. When you're dealing with transactions involving hundreds of thousands of dollars, the last thing you want is uncertainty about whether you've reported everything correctly. Definitely recommend for anyone dealing with complex real estate tax situations!

Something nobody's mentioned yet is that with a 1031 exchange, you're not just deferring taxes - you're also resetting your depreciation schedule on the new property. This can be a huge advantage when upgrading to a larger property. For example, if you've been depreciating your current duplex for several years, you've already used up some of that tax benefit. By exchanging into a new property, you'll get to start a fresh 27.5-year depreciation schedule on a larger asset. This means bigger yearly deductions going forward. Also, don't forget that your closing costs on the new property can be included in your new basis, which further increases your depreciation deductions. This is one of the hidden benefits of 1031 exchanges that doesn't get discussed enough.

Has anyone used a TIC (Tenants in Common) arrangement as part of their 1031? I'm in a similar position as OP but might not want to go all-in on another multi-family. I've heard you can exchange into a partial ownership of a larger commercial property.

Based on your numbers, you're looking at roughly $245k in capital gains ($720k sale price - $410k purchase - $65k improvements). Since you've been living in the upstairs unit, you should definitely explore the Section 121 exclusion first. The key question is whether you can document that you've used the upstairs unit as your primary residence for at least 2 of the last 5 years. If so, you could potentially exclude up to $125k of gains (50% of the $250k exclusion for the residential portion) and only need to deal with taxes on the remaining investment portion. Given that your total gain is right around $245k, the combination approach (Section 121 + partial 1031) could work really well. You'd exclude gains on your residence portion and defer the investment portion through the 1031 exchange. For your financing question - yes, a 1.25 DSCR with 20% down is definitely achievable for a 4-6 unit property in that price range, especially if you can show strong rental income history from your current duplex. One thing to consider: make sure you factor in depreciation recapture on the rental portion. Even with a 1031, you'll eventually face that when you sell the replacement property, unless you keep exchanging indefinitely or hold until death for the stepped-up basis.