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Taking Advantage of Multiple Tax Efficiencies. §1031 and §121 (Principal Residence) for Mixed Use Property.

Sarah, 75, owned a 4-plex multi-family rental and lived in one unit as her primary residence. She was getting tired of being a landlord and had some medical issues and wanted to move to a senior living development a few miles away. Her basis in the property was $200,000 and she sold it for $1.6 million.

Her brother advised her to look into a 1031 exchange to defer what could be a very large tax bill. She also had a $400,000 mortgage on the property.
Ordinarily, she would have had to reinvest all her net proceeds of $1.2million along with taking on $400,000 in new debt to replace the original debt paid off at her closing.
We recognized that she needed to re-invest only $900,000 because she had a primary residence exclusion under IRC §121 providing her a $250,000 tax exemption. She lived in 25% of the unit, so the gain allocated to her unit ($350,000) was sufficient to exceed the amount of the exclusion.

Accordingly, Sarah invested $900,00 into two DST portfolios with an average leverage of 40% allowing her to replace her $300,000 debt ($100,000 was attributable to the personal residence portion) and add another $300,000 giving her more current tax shelter on the $45,000 current income generated by the DST portfolio.
By leaving $250,000 out of the exchange, she also had funds for a large downpayment (less tax on $100,000) to close on her senior living condo.