Tax Strategy for Multi-family Including Primary Residence

[Rick Tchoupz]

Hello Biggerpockets members, 

Last year, my wife and I bought a Miami property with 2 detached homes on it (1 mortgage). We are renting (was already rented) the smaller 1,400 s.f. home. The larger 2,100 s.f. is our primary residence. The living space split is almost exactly 40% (for the rental) and 60% (for our primary residence). The 2 homes have different addresses but are under one property appraiser folio. 

We didn't think through all the tax implications last year until now, as we are getting ready to file our taxes. I was wondering if anyone would have some suggestions on the following elements (we do have a tax accountant but they didn't seem entirely confident on the best strategy and this board may have some insights):

1. We should not factor any depreciation for the rental property. So assuming no depreciation on the rental house. Is that the best option? 

2. How would capital gain work when reselling this property? Say the total property value increases by $700,000 by the time we sell (currently married). Would we be able to get the full $500k capital gain exemption as we have our primary residence on it? Or this may not applicable since there is also a detached rented home on the property?

3.  Homestead exemption: we've received different perspectives on this. Since our primary home makes up the majority of the parcel, we've been advised we could claim it (not renting all or substantially all of the parcel). Some have advised we could not since a portion of the property is rented. I think my best option may be to call the Property Appraiser but before I do, I thought I should educate myself. Here is what the FL status state (196.061 Rental of homestead to constitute abandonment):

(1) The rental of all or substantially all of a dwelling previously claimed to be a homestead for tax purposes shall constitute the abandonment of such dwelling as a homestead, and the abandonment continues until the dwelling is physically occupied by the owner. However, such abandonment of the homestead after January 1 of any year does not affect the homestead exemption for tax purposes for that particular year unless the property is rented for more than 30 days per calendar year for 2 consecutive years.

4. For expenses, we are currently splitting all common expenses along the 40/60 split: property taxes, mortgage interest, landscaper, water (single meter).

For the records, we have no idea what we may do in the future. May take the rented home back if tenant leave or end up renting both homes and buying something else as our primary residence. 

Anyway, any partial advice on these questions would greatly appreciated!! We'll eventually re-run everything by the CPA and let them confirm. Thank you all! 

[Linda Weygant]

1.  When you go to sell, depreciation recapture will be calculated based on Depreciation over the years that was allowed or allowABLE.  Not taking depreciation is a bad idea.

2.  The portion that is considered your primary residence would be eligible for a 121 exclusion.  The other portion would be capital gains.

3.  Definitely seek an expert on that.  I'd argue that 40% is not substantially all, but local statutes can be difficult to interpret.

4.  Generally a decent way to split.  IRS allows "any reasonable method", so as long as this is something that you are doing consistently and can defend as reasonable, you'd be fine.

I do recommend that you engage with a real estate focused tax professional.  

[Rick Tchoupz]

Thank you @Linda Weygant. This is helpful. We definitely need some help to determine what depreciation may be allowable. I was under the impression that deprecation recapture was only based on depreciation that was claimed rather than allowable.  

We'll try to find a local expert to answer #2 and #3 as well. Not sure if this is more real estate law or real estate accounting. 

thank you again,