Reducing Cap Gains
My wife and I bought a duplex and lived in it while renting the other unit for 7 years. During that time the market value of the property rose about $100,000. Last summer, we bought a single family in the same neighborhood and moved into it and since have been renting both units in the duplex. I would like to take profits from sales of both properties and put it down on a new primary residence in another neighborhood. What strategies are there for minimizing cap gains? Because we have relatively low fixed income, we would go so far, if necessary as to sell the single, move into the duplex again to re establish primary residence, and then sell it and take the profits tax free into a new home. Would that work, and what alternatives are there? Thanks for the advice! 
DaveT would be the one to answer this, but if you sell your primary residence, which it looks like you were using the duplex as, then the first 500k of profit is tax free for a married couple. As always, check with your friendly neighborhood tax professional, and don't rely on people posting on a board for your tax services.
Good luck with it...
Thanks, I will consult a professional, just checking my options here. One question is, since we did live in the duplex a year ago and for 7 years, can it still be considered our residence and not an investment property? For the last year we've been living next door in a single family house. :-D
Hi,
I'm coping this from a lawyer's website (Google search), but again consult your accountant as well, but I think you would be fine since you've lived in it for more than 2 of the last 5 years, and you shouldn't have to move back in to claim the gain exemption:
"The new law allows single homeowners to avoid capital gains tax on up to $250,000 of gain from the sale of a principal residence. Married taxpayers can save up to $500,000. In addition, the law still applies to those taxpayers over 55 who have already claimed the one time exemption. The law defines principal residence as a home you have used as your primary residence for two of the past five years. As such, in most instances, taxpayers will avoid capital gains altogether on the sale of their principal residences. The only other catch is that this exclusion can only be used once every two years. "
There is another issue that comes to mind. Since you only lived in one side of the duplex, what about the side you rented out? The issue is whether or not you can claim the side you rented out as part of your primary residence or do you need to pay taxes on half the capital gain should you sell the duplex.
In order to help you need to answer some questions. When you were living in the house did you pay rent and take depreciation on the duplex? If not,have you taken any depreciation? You will probably have to pay capital gains on all of your gain.
Thanks for the info so far, everyone. I have claimed depreciation. You asked if I paid rent? I collected rent from the tennants in the upper unit and claimed it as income. It looks as though we may have to pay taxes on half of the cap gains since the upper unit was always a rental. It also looks like we should be able to escape cap gains tax on the half we occupied as our principle res. But it would be great to hear from someone who has either overseen or experienced recently the same type of situation. Anyone?