What are Tax Consequences of Selling my Investment Property?

[Chris S.]

This is my second post, so forgive me if I don't provide all the necessary useful information for you all to help me make this decision.

I bought a Two Family south of Boston in 2006 for $385K.  It was in bad shape and put about $40K in it initially for renevations.  I've lived in one unit with my wife for the past 7+ years.  We recently purchased a new single family home nearby and are considering selling the 2-Family.

As for stats--

Gross annual rent: $37,800

Operating expenses: $13,062

NOI: $24,738

I've got about $225K left on the note at about 4.8% so after debt service, its cash flow positive to the tune of $400-$500 month.

Never had any problems renting it, in a great location, but it's old (1930) and constantly needing attention.  Just spent another $15K or so on a new roof, electrical etc.

I think i can get at least 650K for it.  With a 4% commision looking at proceeds of 625K or so.

I wanted to use the cash to payoff the bulk of the mortgage on our single family we just purchased.  I just want to be able to live without worry of a mortgage payment and invest where I see fit (stocks, maybe more real estate some day).  I work full time and don't have the time or the patience to manage a property.

I think its a good time to cash out.   My biggest question involves taxes.  What are my consequences if I sell?

[Frank Jiang]

So when you sell a duplex or other property with apparent segregation, you will get the Capital Gains Tax Exemption on half the property, while the capital gains on the other half will be added to your taxable income.

So assuming a 650k sales price, you get a total capital gain of $265k, half of which (132.5k) will be exempt because you qualify for both the ownership and use clauses for half the property.  The other 132.5k will be taxable.  Some of the 132.5k should be reduced thanks to depreciation.

More details on home capital gains exemption here:

http://www.irs.gov/taxtopics/tc701.html

Hope this helps somewhat!