TAx Implication On A 3 Family
I lived in the duplex of my three family for 2 out of the past 5 years. Currently, all three apartments are rented out and I live elsewhere. How are the capital gains figured into this when I sell the building? bought:290,000 in 1997
sold: 700,000 sale pending.
current note:400,000 cash out refi last year.
My CPA ran me in circles so I am somewhat confused at this point.
I'm an Accountant, but not a CPA. Maybe someone else will disagree. But my understanding is that if you lived in it for 2 of 5 years, it can be sold without cap gains.
I was under the impression that I need to pro rate the gains by 33% (the part I occupied) and then pay gains on the 66% which has been rented out???
Which is exactly why I posted that I am not a CPA.
I think I have heard that before as well. If you can't get a straight answer, go to www.irs.gov and search their site.
Quote:I lived in the duplex of my three family for 2 out of the past 5 years. Currently, all three apartments are rented out and I live elsewhere. How are the capital gains figured into this when I sell the building? bought:290,000 in 1997
sold: 700,000 sale pending.
current note:400,000 cash out refi last year.flyboy,
At the time of purchase, you allocated your purchase price between the primary residence and the investment rentals. You say that your residence was a duplex, but that the property is a three-family, so I am confused on how many living units you really have.
Let's say that on a square footage basis, your residence comprised half the total living space of the entire building. Thus in this case, half your purchase price will be allocated to your primary residence, or $145K. Consequently, half of your sale proceeds, or $350K, will also be allocated to your primary residence. The difference, or $205K is eligible for the capital gains exclusion on the sale of your primary residence provided you meet the two year rule tests.
For the investment portion of the property, half of the purchase price ($145K) and half of the sale proceeds ($350) are allocated to your sale of investment property. Therefore $205K will be subject to capital gains taxes at a maximum tax rate of only 15% and the depreciation taken (or depreciation you should have taken, whichever is greater) will be recaptured at 25%.
Of course, for the period of time that your former primary residence was used as a rental (but still eligible for the Section 121 capital gains exclusion), I hope you took a depreciation expense, because the depreciation you took (or should have taken, whichever is larger) will also be recaptured at 25%.
Your cash out refinance has no bearing on your tax liability. Borrowed money is not taxable because it must be repaid.
If this does not clear up the picture for you, post again with more specific details and we will try to nail it down for you.
Thanks Dave T! There are actually a total of three apartments. The duplex I occupied and two one bedroom rentals on the third and fourth floors. Your advise is dfinately in conflict with what my accountant/attorney advised. I took 66% depreciation while I lived there and then 100% after I moved out. I need to look at my books, but I believe I have depreciated it so for for about 40K.
Whoa flyboy! Let's back up a little bit here.
I did not give you any advise, but instead used a hypothetical scenario to illustrate how your tax liability is calculated.
My scenario just assumed a 50-50 allocation. Since you did not give specific details, I made this assumption in a vacuum. If your tax advisor originally suggested that 2/3 of your purchase could be allocated to your investment property, then there must be a sound and defensible basis for doing so.
Just change the proportions for your residential unit in my illustration to 1/3 rather than 1/2, and adjust profit numbers accordingly. Make the same adjustments for the investment use portion of the property. Now, follow the rest of the scenario to estimate your tax liability.