Rental to primary residence to rental again and then sell.

[Daniel B.]

Hi,

We are trying to figure out if we would have to pay taxes on the sale of a duplex that was our primary residence for 2/5 last years, but unfortunately is more complicated.

Property is a duplex, purchased in 2012 as a rental. Paid $110,000, but have around $200,000 in it now. Some improvements were completed when we first purchased with intent to rent (new roof, etc) some improvements in 2015 when we were going to move in (new kitchen, updated bath) and misc improvements as needed during last 8 years.

We moved into one of the units in 2015 (wife got a job just down the road from the property so it made sense). Moved out late 2018 and rented again. We are considering selling this summer, probably worth $350,000.

While we lived there, we lived in the larger unit, this unit currently rents for $1,700, upstairs smaller unit rents for $770, not sure if this matters if we have to allocate costs as a percentage of what we lived in? Also, don’t know if it matters but we intentionally left the upstairs unit vacant for a year when we had a baby...so we kind of used the whole building for a year? We have kept accounting on it since we purchased it in 2012, so have depreciation, etc.

While we occupied one of the units, we didn’t expense the full expenses on the property to account for the percentage of the duplex we were using for our primary residence.

Thank you in advance!

[Michael Plaks]

@Daniel B.

You absolutely will have to pay some taxes. The question is how much, and it's impossible to dissect all the details in an online post. Professional help is highly recommended.

For tax purposes, you had two properties, not one. The smaller unit has always been a rental property and needs to be treated as such. Keeping it vacant for a period of time is not likely to change things, but I cannot tell this for certain without an in-depth discussion.

The bigger unit has been converted from rental to personal and then back to rental. It most likely qualifies for a capital gain exclusion (again, details matter, so this is a preliminary conclusion), but you still owe taxes on all depreciation taken for this unit.

Both units will generate some taxes. And, as you can see, it's rather complicated.