What can you do if part of the property you are selling is your primary residence and another part is used for investment, trade or business? Good news if you may qualify for tax treatment from two different tax codes, IRC Section 1031 & 121. The portion of the property where you live may qualify for the primary residence exclusion 121 ($250k individual and $500k joint/married) if you’ve lived in the property a total of 2 out of the last 5 years leading up to the sale. The other portion of the property used for investment, trade or business qualifies for the 1031 exchange tax deferral.
Common examples of mixed-use properties: farm or ranch that includes a residence; duplex and multi-unit dwellings, where the seller is living in one of the units; having a home office or operating a business out of a home.
Your CPA or Tax Advisor must determine the proper allocations to figure out your basis and gain for the portion used for primary and the portion used for investment, trade or business. Calculations typically are based on different factors like number of rooms, square footage, and possibly by appraisal. Expenses must then be divided appropriately.