Tax Consequences of L/O Sale -- Piper? - Posted by PeteH(NYC)

Posted by PeteH(NYC) on October 31, 1999 at 23:01:52:

Question about this structure before I go ahead and leap:

Have lived in my two-family house for three years now and am inclined to L/O it to my tenants with a three-year option. They would pay me a premium rent for the entire house, rent one of the apartments to cover part of that obligation, and they would receive a reasonable rent credit. I’m thinking a three-year option term so that (a) the rent credit can add up to something like 5% of the option price, and (b) I don’t lose my 2-out-of-last-5-years primary residence cap gains tax exemption. However, because it’s a two-family, I would only have been able to exempt half of the gain – the other half was always treated as rental property.

My questions are thus: would this half-rental, half-primary-residence have been eligible for a 1031 exchange, thereby exempting (I know, deferring) ALL the tax on the gain? Does a 3-year option term eliminate the possibility of a 1031? Is there a better way to write the option to keep the possibility of a 1031? What, overall, is the best scheme in this scenario for dodging Sammy?

(And my all-time favorite, if I borrow more of the equity, won’t that eliminate all my capital gains since they won’t be more than the balance of my new loan? Please don’t take this one seriously.)