Hi, Owner of duplex - rented side A, lived in side B until last year. Moved out and started renting side B - adding to their fixed asset, but am not sure of the cost - the appraised value of entire house went from 130k to 550k. Does Side B cost reflect originial cost or the appraised value? If Side B is 1/2 the appraisal at time placed in service - is there an adjustment for Side A to reflect the market change. Owner is considering selling the entire duplex to a relative this year - so it is important I get this right (regarding capital gain). Thank you in advance.
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You should be treating each unit as a separate entity for calculations.
Side A is rental property under the usual rental rules.
Side B is treated as personal residence converted to rental. Cost basis at conversion is lower of cost or FMV. Appraisal is usually involved upon occurrence of death of an owner or gift value for gift tax filings
You did not state whether the owner lived in Side B for the required period of 2 out of 5 years for Section 121 exclusion on gain.
As well - you should check the rules on related party transactions.Uncle Sam, CPA, EA. ARA, NTPI Fellow -
Thank you, the owner lived in the duplex since 1997. If I read your response correctly, her original purchase of the entire duplex in 1997 was 135,00. Side A was listed as rental and cost $62,500. She lived in Side B until Feb 2023. Bringing Side B on as rental effective 3/23, the cost would be original cost (1/2) plus any improvements - correct?Comment
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Yes that is correctUncle Sam, CPA, EA. ARA, NTPI FellowComment
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Correct - but only improvements applicable to the converted portionUncle Sam, CPA, EA. ARA, NTPI FellowComment
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Thank you you have been a great helpComment
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She now wants to sell the duplex - Duplex owner (purchased 1997) – rented side A, lived in side B until 2023 when they purchased a home and started renting side B. Now wants to sell duplex (to a relative). Total depreciation for all is $12k. purchase price was $125k and selling is $475k. Real Estate agent is telling her either 1301 (if she buys another rental property) or all gain is excluded because it was personal residence for at least 2 of last 5 years. Another suggestion is recapture depreciation from gain and apply 50% to Side A. Thoughts?
Thank you for your time. DJ
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Yes, if she wants another rental or business property she may be able to use a third-party intermediary to do a ?1031 Exchange if all of the rules are followed. That could potentially defer some or all of the gain (depending on how much the new property costs) into the new property.
The two-out-five year exclusion would only apply to her 50% Side B. If they don't do a ?1031 Exchange, Side A would still be fully taxable and so would the gain due to depreciation on Side B.Comment
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