Posted by Nate on February 26, 2001 at 08:52:55:
While you rehab the owner-occupied duplex, are you renting out the other side?
If so, you have a little tricky situation here because the duplex, even though it’s physically only one piece of property, is considered both your personal residence (a non-investment property) and a rental property (investment property) for tax purposes.
What you will need to do to avoid paying any tax upon sale is to do the following:
Let’s assume your net profit is X.
Half of X is profit from your personal residence, and the other half of X is profit from the investment property.
The profit from your personal residence is not taxed provided it is less than $250,000 ($500,000 if you are married), and you have lived in the property for an aggregate two years out of the last five years.
If you have lived there for two years, there is no requirement that you roll over the proceeds into anything in particular, nor that you buy another personal residence at any time. That is the new tax law.
If you have not lived there for two years, you must pro-rate the gain for the amount of time you have lived there.
In either case, the excess over the exempt amount is taxable as a long-term capital gain if you have lived in the property for over one year. There is no way to avoid paying taxes on the excess, if there is any.
Now, for the investment property side: you can do a 1031 exchange to shelter the gain here. You CANNOT include the gain from the personal-residence side of the duplex, because that is not investment property.
A good CPA will be needed to figure out the allocations of purchase price, sale price, and gain to the two sides.
If you wanted to make things a lot easier, Bob, and you have the time to do this, I would suggest moving out of the owner-occupied side and renting it for at least six months. That way the entire property will be considered rental property and can be 1031 exchanged into another property.