Topic: Like Kind Property
Like Kind Property
I own a legal two family house and am thinking of selling it, buying a legal three. The three family house is of lesser value, I would be renting one of the units and using the house as my primary residence. Would this qualify as a like kind of property and how would that benefit me?
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“Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence..[….].. does not qualify for like-kind exchange treatment.”
http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031
The benefit would theoretically be tax deferral of gains on the house that you sold. However involving your primary residence excludes this treatment. You did not mention if you live in the two family house or it is a business investment, but I believe that having your primary residence in the newly acquired property would exclude the 1031 like kind treatment. I am not a tax attorney but if this is important to you i would 100% recommend you consult one if large capital gains are involved.
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Consult the accountant that has been filing your taxes for the past few years.
If you have been declaring 50% (for sake of ease for this example) as rental investment, declaring the income and taking the deprecation; then the 50% of the sale that has been an investment can be used for a 1031 exchange. The 50% that is your primary residence you can get $250,000 as a single person or $500,000 as a couple tax free from capital gains.
Beware that your future investment will need to flow through and eventually you will pay the capital gains tax on the investment portion down the road. So is it really worth it? It depends on the numbers and your tolerance for an IRS issue chasing you down the road.
You need a good accountant to work out if it is worth it to you.
