as far i was aware this whole time when you owner occupy your duplex one side and rent the other for 2yrs and you sell it within 5yr period there is no capitol gains tax. Is that statement true? I'm getting a lot of different responses. Anyone had this experience before, and what happened? Thanks!
My understanding is the same. If you lived in the property for 2 of the last 5 years then you do not pay capital gains tax when you sell. The two years that you lived there do not need to be consecutive either.
Not a cpa, not a lawyer, just a reader....TBS.
I’m pretty sure you’re generalizing at least a couple ideas...
The best you’re going to do is tax free on the side you lived in, if it’s under $250k or $500k if married, you’re going to owe capital gains tax and depreciation capture on the rental side regardless
You have to have lived there as your primary FIRST, if it was a rental first, you’re going to owe capital gains and DR on the percent of time the half you lived in was a rental, and 100% of the other unit.
@Igor Balakhnin pretty sure @Bill Brandt is correct. It's similar to how you report it for tax purposes in years where you aren't selling it, you report 50% (or whatever % is allocable to each side) as rental property and depreciate that 50% while the other 50% is your own personal residence and therefore is not part of Schedule E.
Hi @Igor Balakhnin ,
Assuming that the units are the exact size, you taxable gain would be allocated 50/50 between the owner occupied unit and the rental unit. The gain allocated to the OO unit will be tax free up to $250,000 if single or $500,000 if married. The other 50% of the gain allocated to the rental property portion would be taxable or could be tax-deferred through a 1031 Exchange.
@Igor Balakhnin , the duplex hack with a primary residence loan is one of the most powerful ways to jump start an investing career. There's just a little bit more to it than you thought. Even though it's one loan (and if you use FHA financing a low interest loan at that) FHA parameters view it as you owning two properties - one your primary and one an investment property.
When you sell, if you have met the residency requirements of the primary side you will get that gain tax free up to the 250/500K limits. You an use a 1031 exchange on the portion allocated to the investment side.
So in one move you get a low interest FHA loan. Purchase a primary residence and an investment property. An at sale you get to take some of the profit tax free and indefinitely defer the tax on the rest.
It's an awesome strategy. And many times investors will simply do it again and again... In the 1031 you must purchase at least as much real estate as you sold (the investment side allocation). So if you sold a $400K duplex you could 1031 the $200K of investment side into another $400K duplex and again move into the one side. Or maybe an $800K quad (FHA allows up to 4 units with this financing) and live in one of the units before repeating.
Congrats again on a great strategy.