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Jason M. Tyra, CPA
Jason M. Tyra, CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 178
Experience:  Principal at Jason M. Tyra, CPA, PLLC
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I have a mixed use property in Chicago - zoned mixed use

Customer Question

I have a mixed use property in Chicago - zoned mixed use B1-2. My wife and I live in the appartment upstairs and have a store front that we use as basically a living space and office for our convention photography business. We currently write off half the building's expenses on our schedule C sole proprietorship.
Question: we are considering moving to Mesa, AZ and i large house. We would live in the house and use it for the same business purpose and not have a separate business location. Would we still have to pay cap gains on the sale of our Chicago mixewd us property? We bought years ago for $102k and have about $75k in improvements and the market value is about $500k to $600k. Is a 1031 exchange possible or are there any other ways we can avoid either the cap gains tax, or the depreciation recapture tax?
Thanks for your help!
Submitted: 9 months ago.
Category: Tax
Expert:  Jason M. Tyra, CPA replied 9 months ago.

Hi Michael:

The key requorement for a successful 1031 exchange is the acquisition of property that is considered like-kind by the IRS. I think it is probably not likely that a house would be like-kind to a mixed use property, even if the the way that you use it in your business is similar. You can request a private letter ruling from the IRS on this.

The portion of your property that is your primary residence would enjoy the $500k exemption on your gain, so you would only owe tax on depreciation recapture and capital gain for the business use portion.

Customer: replied 9 months ago.
Thankd for your help and fast reply Jason! Are there any other options to avoid the 50% gain on the business portion of the property or the recapture?
Customer: replied 9 months ago.
How do you do a "private letter inquiry"?
Customer: replied 9 months ago.
one more question... what if I stop using the property for business for two years and only live in the building? does that have any impact?
Expert:  Jason M. Tyra, CPA replied 9 months ago.

I can't think of any realistic ways to avoid the gain other than to buy another mixed use property and use the 1031 exchange rules.

A letter ruling is basically a request for the IRS to tell you how they would view a transaction, given a certain set of circumstances. The IRS website has instructions on how to submit one, but I would recommend that you retain someone who specializes in PLR requests to handle it for you. In my opinion, you have only a small chance of a favorable ruling.

If you stopped using the property for business, it would still be like-kind only to other mixed use property. Its classification is not dependent on how you use the property, but on what it actually is.

Customer: replied 9 months ago.
Thanks again for your help!
Expert:  Jason M. Tyra, CPA replied 9 months ago.

You are most welcome. Please let me know if there is anything else I can do for you and don't forget to rate!

Expert:  Jason M. Tyra, CPA replied 8 months ago.

Just a friendly reminder- rating my answer to this question is how I get credit for answering it. Please take a moment to rate.