What strategy with a new construction luxury duplex?

[Josh W.]

All,

Here are the numbers.

I am purchasing a duplex that is in the middle of construction for 525k in Va. Work on the project stopped 2 years ago when the market crashed. It will take 300k to finish for a total investment of 825k. (This duplex is beachfront 9500sq/ft for the numbers to be so high) I plan to sell my current home and move into one side of the duplex.

My current home was purchased for 400k in December 09 and I put 40k into it. I anticipate selling for 525k. If I sell before December I am shy of the 3 year requirement of the 8k first time homebuyer tax credit.

The other side of the duplex can rent for 3k-3.5k/month or sell for 600k immediately or 700-800k if I take some time. The entire project will be worth 1.2 to 1.5million when complete. This is not our final home and I will probably move after 2 years. When we move we will figure out if renting it out or selling our half is a better option.

How do tax laws work when selling half of a duplex? Do I get crushed in capital gains if I sell half and reinvest that into my side of the property? Can I invest that gain into other properties? Am I better off renting half out for a few years and then selling? Is it a gain if I am not actually taking any money out from the sale, just putting it towards my 825k note to knock down my mortgage?

After the sale of half of the duplex it would cut my mortgage down to 100-200k and leave me money from my salary to make other investments after a year. I would like to sell half immediately to take the risk out of it but I don't want to lose in taxes.

Please point me to the tax code that covers this situation, I am at a loss right now and not sure if renting or selling is the best way to go. This extends us pretty far, it would hurt if it went unrented for a while but the entire property would be positive cash flow if we rented the whole thing out.

Thanks!