Ok help me! I have a very complicated capital gains tax question. We purchased 2 duplexes (bldg A and B) on the same lot for $500k in Loveland CO. We have since been going through the approval process to split off one of the building onto its own lot. We plan on selling one of the buildings (bldg B) as it’s older and just way too much work. We purchased this as a fixer upper and renovated the snot out of it. The one duplex building (bldg B) we want to sell is valued at $425K now.
So here’s the question- how does capital gains work on this? We purchased for $500k (bldg A and B) and we are selling one bldg (bldg B) for $425k. So technically we aren’t “profiting”, therefore no capital gains (I hope). A friend said that I would need to calculate the square footage of each building in order to know how much of the $500k (bldg A and B original purchase price) was actually spent on the older building we want to sell. If I do that calculation that puts the original purchase value at $222k (bldg B). How does the IRS view this situation? I thought as long as you sell for less than you paid, you’re free and clear of capital gains. Let’s say my friend is right- we sell bldg B for $425k and we use the imaginary made up sales price of just one of the buildings based on square footage which is $222K of the $500k we spent on both buildings. So I would be taxed for capital gains on $203K? ($425K minus $222K).
Gah!!! Please let someone on here be smarter than me. Even tax professionals are stumped on this one.
PS we actually lived in this duplex 9 months of the last 5 years.... not that that helps since I believe the capital gains exclusion is only for 2 of 5 years.
