Capital Gains on property sale

Massachusetts

I'm selling a 2 family house which I've owned for 20yrs.
One apartment has been owner occupied the whole time , and the other has been rented.
I've been depreciating the rental portion of the house (1/2 of the purchase price of the house less portion for land) for the 20 years, and also I depreciated 1/2 the cost of new roof, new siding, new windows & new garage .

The kitchen in the owner occupied apt. was in poor cond. and required complete remodel to the tune of 35K just two months before selling.

My question is three fold:

1.) Upon sale, does the entire R/E Broker commision come off the sale price of the house prior to figuring capital gain?

2.) Does the kitchen remodel also come off the top due it's being necessary to make the sale because of it's poor prior cond.?

3. ) How is all the depreciation treated as it applys to cost basis and capital gain?

Thank you,
Higgins -- from Massachusetts

You have a complex set of facts and should see a professional tax preparer this year. To help guide you, think in terms of two sales and not just one.

However,
1. Essentially, yes.
2. The kitchen will be part of the basis of where it done. (I'm guessing the personal residence portion.)
3. Since you deducted the depreciation, you will need to recapture it on sale at greater than capital gain rates.

Even in the simple answers I provided, there are issues to resolve. See a tax pro this year. You are going to want to shift as much of the gain to the personal portion of the property (and gain from the exclusion) and I bet you will try to be a little too aggressive in order to keep taxes down. (Although, having the property for 20 years will almost assuredly use up the entire exclusion amount and may not make any difference once the numbers get put on paper.) Mistakes on the reporting of property sales have a way of comming back and costing lots and lots of money.

Because this was a duplex, you'll have to treat it like two separate houses. Selling the rented half will produce recapture of depreciation and fully taxable capital gains. Selling the personally used half will produce capital gains, most of which will be excluded from income. Any expenses/improvements that were specific to one half are claimed only for that sale. General expenses/improvements are split between both halves.

If you'd posted before selling, we'd have told you to consider living in the rented half for 2 years before selling. Then you could have treated the entire property as a personal residence and only recaptured the depreciation claimed and paid tax on any gains over the exclusion limit. Depending on the numbers, this could have saved you lots of $$ in taxes. OTOH, if the property has gone up so much in value that you are already using the full exclusion, you don't lose anything by not living in the rented half before selling.

abezon said:

If you'd posted before selling, we'd have told you to consider living in the rented half for 2 years before selling. Then you could have treated the entire property as a personal residence and only recaptured the depreciation claimed and paid tax on any gains over the exclusion limit. Depending on the numbers, this could have saved you lots of $$ in taxes. OTOH, if the property has gone up so much in value that you are already using the full exclusion, you don't lose anything by not living in the rented half before selling.

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That's interesting. I've been thinking about buying a multi-family home or apartment building, and wondering how it would play out w/ my tax if I live in one of the units. Suppose someone buys a 4 unit apartment building. Is there a strategy for avoiding capital gains entirely, if the owner hops from one unit to the next every time there is a vacancy? Or does the 2 of 5 year rule effectively limit the exemption to 2 units?

Also, suppose someone partners with a friend to buy a 4 unit building - and each partner occupies a unit, and each make the switch to the other units 2 years before selling. Then are capital gains involved in that case?

jgombos said:

That's interesting. I've been thinking about buying a multi-family home or apartment building, and wondering how it would play out w/ my tax if I live in one of the units. Suppose someone buys a 4 unit apartment building. Is there a strategy for avoiding capital gains entirely, if the owner hops from one unit to the next every time there is a vacancy? Or does the 2 of 5 year rule effectively limit the exemption to 2 units?

Also, suppose someone partners with a friend to buy a 4 unit building - and each partner occupies a unit, and each make the switch to the other units 2 years before selling. Then are capital gains involved in that case?

Click to expand...

It would not be possible to live in each unit, two out of the last 4 years. However, if 4 people went in together on a 4 unit building, and all lived there, then each of them would have an exclusion on their portion of the building....so that wouldn't be an issue.