Do you pay capitol gains tax on owner occupied duplex at sale?

[Igor Balakhnin]

Hi,

as far i was aware this whole time when you owner occupy your duplex one side and rent the other for 2yrs and you sell it within 5yr period there is no capitol gains tax. Is that statement true? I'm getting a lot of different responses. Anyone had this experience before, and what happened? Thanks!

[Dave Foster]

@Igor Balakhnin, the duplex hack with a primary residence loan is one of the most powerful ways to jump start an investing career. There's just a little bit more to it than you thought. Even though it's one loan (and if you use FHA financing a low interest loan at that) FHA parameters view it as you owning two properties - one your primary and one an investment property.

When you sell, if you have met the residency requirements of the primary side you will get that gain tax free up to the 250/500K limits.  You an use a 1031 exchange on the portion allocated to the investment side.  

So in one move you get a low interest FHA loan. Purchase a primary residence and an investment property. An at sale you get to take some of the profit tax free and indefinitely defer the tax on the rest.

It's an awesome strategy. And many times investors will simply do it again and again... In the 1031 you must purchase at least as much real estate as you sold (the investment side allocation). So if you sold a $400K duplex you could 1031 the $200K of investment side into another $400K duplex and again move into the one side. Or maybe an $800K quad (FHA allows up to 4 units with this financing) and live in one of the units before repeating.

Congrats again on a great strategy.