Tax consequence on selling half duplex

Member since 2020 · 56 posts · 24 votes

Hi,

We have a full Duplex (investment property), and wondering what are the tax consequences if only 1 of the 2 unit is sold? How are depreciation recaptures, capital gains etc are calculated ? What happens to outstanding loan? Is lender approval needed for the sale?

Thanks.

Sattir B

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Scott Mac

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

You might change the supply and demand for your investment.

If you do this, you will have 2 SFH's that if investors want to buy and rent will have to pay 20% down for each vs a low down FHA for a duplex house hack.

Your buyers pool might be smaller due to this.

Also you will be competing in sales with SFH's which in some areas greatly outnumber duplexes but will have created 2 condos (which in some areas have lower desirability than SFH's or duplexes).

Just my 2 cents.

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Account Closed
Member since 2020 · 984 posts · 1k+ votes
4y
Is there something new about this I've never heard of?
I never heard of it being legal to sell half of a duplex. How can you do that it the property has only one Assessor ID number? I can't see a lender allowing you to have a loan and then sell half of their collateral.
You may be able to write some sort of agreement with a family member and pocket the cash, but the lender won't honor your agreement.
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Marian Smith
Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
4y
@Jack Orthman Here they create a condo regime with 2 member hoa. Not sure how they restructure the original loan.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
4y
Your basis on the property will be allocated between the 2 units and you'll be taxed based on the gain on the half that's sold.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
@Sattir Bitti the first thing to determine is if the two units are legally separate, so that you can sell one. If they are not, that needs to be figured out first. The loan will likely need to be paid off and you can take a new loan on the single unit. The lender will not let you sell half the property because the entire property is mortgaged. It is technically possible to split and sell units in any property, but as @Marian Smith mentioned, it may mean setting up a condo type arrangement with HOA if the property wasn't built as a twin home with two separate units that have a split in the middle.
Why are you doing this versus just selling the entire property?
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Sattir Bitti
OP
Member since 2020 · 56 posts · 24 votes
4y
Forgot to mention that the units have their individual Assessor ID number. Duplex has HOA.
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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
4y
You might change the supply and demand for your investment.

If you do this, you will have 2 SFH's that if investors want to buy and rent will have to pay 20% down for each vs a low down FHA for a duplex house hack.

Your buyers pool might be smaller due to this.

Also you will be competing in sales with SFH's which in some areas greatly outnumber duplexes but will have created 2 condos (which in some areas have lower desirability than SFH's or duplexes).

Just my 2 cents.

2 Reply
Sattir Bitti
OP
Member since 2020 · 56 posts · 24 votes
4y
this is one of the properties which has low vacancy, but appreciated quite a bit. Wondering how to leverage the appreciation. HELOC in TX for investment property seems not possible.

Originally posted by @Joe Splitrock:
@Sattir Bitti the first thing to determine is if the two units are legally separate, so that you can sell one. If they are not, that needs to be figured out first. The loan will likely need to be paid off and you can take a new loan on the single unit. The lender will not let you sell half the property because the entire property is mortgaged. It is technically possible to split and sell units in any property, but as @Marian Smith mentioned, it may mean setting up a condo type arrangement with HOA if the property wasn't built as a twin home with two separate units that have a split in the middle.
Why are you doing this versus just selling the entire property?

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Colin Wyatt
New to Real Estate · Madison, WI · Member since 2020 · 26 posts · 13 votes
4y
Originally posted by @Scott Mac:
You might change the supply and demand for your investment.

If you do this, you will have 2 SFH's that if investors want to buy and rent will have to pay 20% down for each vs a low down FHA for a duplex house hack.

Your buyers pool might be smaller due to this.

Also you will be competing in sales with SFH's which in some areas greatly outnumber duplexes but will have created 2 condos (which in some areas have lower desirability than SFH's or duplexes).

Just my 2 cents.

Certainly good questions to figure out if it makes sense in your market. Over the summer, we were looking for a duplex and saw a couple instances of a zero-lot line split of a duplex. One for sale had 3 MLS listings, for each individual unit and one that advertised it as a duplex. We were advised that we couldn't use an FHA and get both sides, so we couldn't pursue for a house-hack.
I think it was around $350k for both or $215k each. They ended up selling individually and the seller got an extra $80k that way. So while investors got chased away from the deal, the seller still had plenty of buyers to choose from in the hot market.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
4y
@Sattir Bitti

You would allocate cost basis to the unit being sold.
I.E. allocate purchase price, improvements, depreciation, etc to calculate your gain.
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