Primary Residence/ Capital Gain

7 Replies

Hi,

I recently bought a Duplex as a primary residence, I plan to live on one side and rent out the other side.


Now I have another plan that i want to sell the Duplex. Since the duplex was under a primary residence loan, do i have to pay Capital Gain when i sell it?

Any advise would be appreciated.

Thanks

@Phuong Dinh , you have to live in a property for 2 of the last 5 years for it to qualify for the capital gains exemption. Additionally, if you are claiming income and depreciation on the property that may impact the exemption as well. You need the opinion of a CPA on that second part.

In addition to the 2/5 year requirement, you are only excepted from capital gains for the portion of the house that you live in.  Since you rented out the other half, you have to pay capital gains tax on that portion regardless of how long you have lived there.

@Phuong Dinh , Think of that duplex as actually two different properties.  One is your primary residence and both @Edward B. and @Frank Jiang are correct - once you live in it for 2 out of the 5 years prior to sale you can take the first $250K in profit from that side tax free ($500K of profit if you're married).  

The other side is an investment property and you will pay tax on the gain associated with it unless you do a 1031 exchange and defer the tax by using the process and buying another investment property.

You can always move out of the one side and use the entire property as investment for a year or so and then sell and 1031 the entire thing.

But The really powerful thing is that if you hang on to that property and continue to live there until you qualify for the primary residence exemption you can then sell and take half of the gain tax free and defer the tax on the remaining gain with a 1031.

I think you need to do an analysis to see what the potential gain that you will be excluding.

If you brought the duplex for $50,000 of which consisted of 2 identical properties; each property is worth $25,000.
If the property is now valued at $52,000 - you may make a decision that it is not worth it to stay in the property for 1 more year to potentially save a couple hundred in taxes.

However, if the property has significantly increased in value - then there is more incentive to stay in the property for full 2 years before you sell it.

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