Selling Property
First, I would like to thank you guys great job...lots of info in here.
Im selling a 2 family property in NY. Owned it since 11/98 and have lived in it since last year and had it rented out since day 1. I earn under 27k so I'm am assuming I will be at the lower end tax bracket, right? The title of property reads myself and one other person who makes well over 60k. How much capital gains tax will I have to pay? Don't we split profit and the capital gains tax will be taxed on the half seeing there are two people on title? What's the best way to minimize the taxes? Any response will be appreciated. thanks
fdtfla,
First let me restate your scenario to set the stage for my questions.
You and your partner (an unrelated person) are the co-owners of a two-family building (which I will call a duplex hereinafter). For the past year, you are a resident in one unit, but the current status of the other unit is unclear. Prior to your occupancy, both units were operated as rentals.
QuestionsAre you occupying both units as your primary residence? If not, who receives the rental income from the non-resident unit?
What is your agreement concerning the mortgage, taxes, insurance, rental expenses, utilties, etc. for the unit you occupy and for the rental unit?
Do you pay any "rent" to your partner for the unit you occupy?
What is your tax filing status -- single, married filing jointly, married filing separately?
Thanks DaveT for response.
Hopefully I can make it clearer:
First of all the other person on the deed (partner) is my Dad. I don't know if it makes a difference or not if relative.
I just got married in Jan, so I will be filiing with a married status. My wife is unemployed(housewife)
As far as duplex, I been living there for 4 years in the basement apartment and I received rent from the other two apartment rentals. I used the rental income to pay for my mortgage,house expenses, util, and homeowners insurance. In Dec of 02 just bought home in Fla, where I now reside and even have the basement apartment rented out in the duplex to help pay my new mortgage.
Hope I made Things clearer. So how can I minimize capital gains? thanks
What is the agreement with your Dad? Has he been sharing in the income and expenses of the property, or, did you just use his credit to purchase the property while you made all the required payments and collected all the income?
Case 1. You used your father's credit to qualify for the mortgage, you alone made all the mortgage payments, you reported all the rental income and expenses on your income tax return, your father will sign the deed with you when the property is sold, but your father will not share in any of the profits.
In this case, you would treat the sale of the property as two separate transactions, even though only one sale takes place. The first transaction is the sale of the rental property. The second transaction is the sale of your former primary residence.
For the sale of the rental property, capital gains and depreciation recapture will apply. It appears that your capital gains tax rate will be 5%, while depreciation recapture remains at 25%. The profit from appreciation will be taxed at 5%, while the depreciation you took (or should have taken) during your holding period will be taxed (recaptured) at 25%. You can use a 1031 like-kind exchange to defer the taxes due on the rental property sale.
For the sale of the residence unit, you are eligible for the capital gains exclusion on the sale of your primary residence. Up to $250K of profit due to appreciation can be excluded from capital gains, but depreciation recapture will still apply for the period of rental use.
Case 2. You and your Dad split all the bills for the rental property, while you just reserve the residence unit for your personal use and pay all the costs and expenses association with ownership.
Once again, the sale of the property is treated as two separate transactions, the sale of the rental property and the sale of your former primary residence.
The treatment of your former primary residence is the same as in Case 1. For the sale of the rental property, you calculate the profit from appreciation and the depreciation recapture as before, but this time you only report half of the profit and recapture half of the depreciation, while your Dad takes credit on his tax return for the remaining half. Both you and your Dad can take advantage of a 1031 like-kind exchange to defer the taxes on your respective shares of the profits from the sale of the rental property.
A professional tax preparer should be able to help you both complete your tax returns for this transaction.