Many people that are selling a duplex, triplex, or property that they’ve lived in as their principal residence will be able to avail themselves of two important tax code provisions.
What is the Principal Residence Exclusion?
The first is the principal residence exclusion, which allows you to take up to $500,000 tax free if you’re married filing a joint tax return, or $250K if you’re single, and exclude that portion of the gain that relates to your relinquished property.
So on the sale of a duplex, half of the relinquished property that the owner occupied, that portion of the proceeds would be eligible for the exclusion. The other half of the duplex may be eligible for section 1031 where we can defer the gain.
Keep the Allocation Consistent
Now the portion of the proceeds that relates to the rental side, the gains are only deferred. The important thing to remember is that however you’ve treated that duplex or triplex in the past, in allocating the business and depreciation and portion of the property that you treat it as a rental, you want to stick with the same allocation when you go to sell the property. So whatever allocation you made in the past should be consistent with your split of the proceeds when you sell this duplex or triplex.
1031 Exchange Resources
For more information on 1031 exchanges of real estate, don’t hesitate to reach out to the qualified intermediaries at Commercial Partners. We have decades of experience facilitating exchanges of all shapes and sizes and can help you defer capital gains on your next transaction.