A duplex combines two separate living spaces into one building. The spaces are typically divided by a shared wall or split into two floors. Each apartment must have its own entrance that does not intrude into the other tenant's space. If you own a duplex, renting out the unoccupied side can bring in extra income and entitles you to various tax benefits. The half of the duplex that is your residence is treated differently than the rental side when you calculate your deductions, business expenses and capital gains.
Mortgage and Taxes
You may itemize your personal portion of the mortgage interest on Schedule A. The portion of mortgage interest allocated to the rented side must be listed as a business expense on Schedule E to offset your rental income. Your business license is fully deductible on Schedule E because it only relates to your rental of the vacant side of the duplex. Property tax and special assessments must be split between personal and business deductions.
Repairs and Maintenance
Allocate maintenance and repair costs based on the proportion of rented space to personal space. You may deduct 100 percent of any repairs performed on only the rented space. Common area expenses such as gardening and pest control must be split. Capitalize major improvements and deduct depreciation on the rented portion of the property each year.
Start with the purchase price of the duplex. Use the property tax bill to find the split between building and land. Split the building cost according to the portion of the duplex's square footage that is being rented out versus the portion you are using as your residence. Add the cost of any improvements related to the rental. The result is your basis for depreciating the rented side of the duplex. You may depreciate residential rental properties over a period of 34 1/2 years.
If you sell the duplex for a profit, you must pay taxes on the realized capital gain. Increase the sales price by the amount of your outstanding mortgage if the buyer will be assuming your payments. You can exclude $250,000 of capital gain on your primary residence if you are single and $500,000 if you are married and file a joint tax return. To qualify for the exclusion, you or your spouse must live in the duplex for at least two of the five years before the sale. You may only use this exclusion once every two years.
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