How to calculate the amount for 1031 exchange in an owner-occupied 4-plex?

[streampaw]

Let's say there's a multi family 4-plex. Owner bought it for 400k and lived one of the units for two years, then sells it for 700k. The owner pays 6% commission to the realtor for the sale which is $42,000. The owner also has a mortgage on it that's for 350k. I want to figure out some numbers. 

Let's assume for simplicity's sake that the owner lived in 25% of it for those two years. 

What is the total amount that the owner can claim tax free? 

What is the total amount that needs to go through a 1031 exchange? 

Here's how I calculated it so far: 

700k * 0.75 (rental percentage) = 525k sales price for the rental portion. 

700k * 0.25 (primary percentage) = 175k sales price for the primary portion. 

Now the purchase price: 

400k * 0.75 = 300k. (rental)

400k * 0.25 = 100k. (home)

So, 525k-300k= 225k capital gains? Which means we need to reinvest this 225k via a 1031 exchange? 

I assume 175k-100k = 75k home gains, which can be tax free. 

Question 1: Where do we deduct the realtor fees? From the "rental" portion, home portion, or split it 75/25? Or deduct it before we calculate the rental/home portions of the sale price? 

Question 2: What happens with the rest of the profit (difference between original purchase price and mortgage left)? We bought it for 400k, but the mortgage is only at 350k right now, so where does that extra 50k profit go? Is it just tax free cash just like the primary residence profit? 

[Anonymous_ · Accepted solution]

You are going to have to allocate the brokerage commissions between the owner-occupied units and the rental units.

The mortgage balance would be disregarded (not factored into the calculation) unless assumed by the purchaser of the relinquished property.

Obviously, you can use the home sale exclusion for the owner-occupied unit provided you have owned, and used the unit as your main home, for two or more years leading up to the exchange,

[streampaw]

Let me make sure I get the numbers right... 

So the rental portion for the realtor fee would be 42k*0.75=31.5k. 

Home portion: 42k*0.25=10.5k. 

So, to calculate the amount we need to put towards a 1031 exchange, would it be like this: 525k (rental portion sales price)-300k(rental portion purchase price)-31.5k (realtor fee rental portion)= 193.5k? Is this the amount we would need to exchange? 

For the primary residence tax free gain, we would have: 175k (sales price)-100k (purchase) - 10.5k (realtor fees) = 64.5k. 

Now, the total amount we would technically keep is 700k-42k (realtor fees)-350k mortgage = 308k. Assuming we are putting the 193.5k towards a 1031 exchange, and the 64.5k is tax free cash from the primary, what happens to the remaining 50k? Is it also tax free cash? Because we have 308k-193k-64.5k=50k that we haven't accounted for. 

[Anonymous_]

The calculation can be boiled down to FMV for FMV so the replacement property needs to have a fair market value equal to, or greater than, the fair market value of the relinquished property (which in this case would be the business use (or rental) portion).

[streampaw]

That won't be a problem since I'm buying multiple replacement properties. I'm wondering about what happens with the non-1031 funds above. The 50k. Do I just get to keep it in my bank tax free? 

[Anonymous_ · Accepted solution]

Yes. Note that, again, you need to keep the mortgage balance out of the gain/loss equation.