i bought a duplex (!)

6 Comments Add your own

• 1. Vitaly Gnatyuk  |  June 7th, 2008 at 4:04 am

  “I was able to depreciate half of my house (the rental part). I’m writing off a portion of the value of the house every year (half the original purchase price, spread over 27.5 years), as though it were being “used up” by being rented out — while in fact, it’s appreciating in value. ”

  27.5 years is great, but you can/could make it better. Land improvements (sidewalks, fences, landscaping shrubbery, septic systems, water pipes) – 15 years, Computers and peripherals – 5 years, Typewriters, adding machines, copiers – 5 years, Automobiles and trucks under 13,000 lbs. – 5 years, Office furniture (desks, chairs, file cabinets, etc.) – 7 years,

  These Items can be depreciated much quicker and save hundreds or thousands on your taxes. Search the irs website for more info.

• 2. Johnny  |  June 24th, 2008 at 7:57 pm

  I love your site. I’m thinking about buying a duplex in the coming months and this seems to be one of the best resources out there. As for tax deductions, what are the rules for applying a loss on your rental property as a tax deduction on your personal income?

• 3. Murad  |  March 23rd, 2009 at 5:14 am

  Thanks for your post. I was wondering if you have further thoughts on a couple of questions I had:

  - you mention that you were able to take deductions on the rental unit that you normally wouldn\’t be able to. But then you include mortgage interest. Isn\’t that wholely deductable as a home owner? In fact, is there a benefit in showing a loss on schedule E? ( wouldn\’t only need to offset the rental income? ). Why not deduct the mortgage interest in its entirety as a home owner ( not a rental expense )?

  - I think normally if you sell a house and make a profit, then apply that profit to the purchase of a new house, some of that profit is not taxable ( I think 500K or so ). Do you know if this is also true for a duplex if you have been renting part of it?

• 4. landlady  |  March 25th, 2009 at 1:12 pm

  Murad — mortgage interest is deductible for any homeowner who itemizes. However, by including half of the mortgage interest for a duplex as a rental expense, along with other items (expenses, depreciation, etc.), you’re able to show a LOSS on your schedule E. And yes, you do want to be able to show a loss — this offsets your income for the year.

  Deducting the duplex mortgage interest in its entirety as a homeowner, instead of a rental expense, would be simply “doing it wrong.” If you go to a tax accountant, they’ll split everything down the middle in order to file your taxes properly. Of course, if your duplex is set up such that one unit is much larger than the other, then perhaps two-thirds is a rental expense, while one-third goes on your schedule A.

  I’m not selling my duplex any time soon, but yes, it is my understanding that if you live in a duplex before selling, you get the same tax benefit on the profits that you would if it was a single-family home.

  Again, I’m not an accountant, so definitely check with an accountant or tax professional before filing anything or making any big decisions.

• 5. Family Income Benefit Insurance  |  February 10th, 2010 at 1:12 pm

  Good sound solid advice

• 6. Peter  |  February 15th, 2010 at 9:44 am

  Thanks for a great post. The discussion of owner-occupied multifamily tax strategy is hard to come by. I have tried to develop my own plan by scouring the IRS website (extremely time-consuming). I think that two issues should probably be clarified here:

  (1) “And yes, you do want to be able to show a loss — this offsets your income for the year.”

  On the Schedule E, the losses sustained from depreciation, mortgage interest, and other rental costs outlined in the post offset RENTAL income. Unlike the mortgage tax deduction that you get for your personal unit, this does not directly offset annual income generated outside of the property itself (from your job). If you treat them in the same way, you are certainly “doing it wrong.”

  With that said, if your annual rental income turns out to be a loss, then this can offset other income just like any other investment loss. However, there is an annual cap on these losses. If, for example, you have a very expensive year due to major repairs or other costs, I believe that losses above that cap can roll over to offset the next year’s income. So keep track of them.

  (2) “I’m not selling my duplex any time soon, but yes, it is my understanding that if you live in a duplex before selling, you get the same tax benefit on the profits that you would if it was a single-family home.”

  From what I have read, you will be entitled to the capital gains exemption ($250,000 if single or filing separately, $500,000 if married) for your PERSONAL unit. That is, the unit that you have resided in for at least 2 of that past 5 years. Capital gains associated with the other unit will be fully taxed. So any appreciation in the value of your rental unit (50% of total gains) will be taxed upon resale, minus the cost of capital improvements that you make (ie new roof, new windows, new kitchen, etc). So KEEP TRACK of the cost of capital improvements made to the rental unit (or 1/2 of the improvements made to the entire property).

  I have a call into the IRS to make positively sure that this is the case — I am currently about 85% sure.

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