You get the perfect blend with a duplex, in that you profit from the advantageous funding sources for one-to-four-unit residences, as well as the investment and tax advantages that come with owning a rental home. You not only profit from your duplex, but you also keep some or all of it tax-free. Moreover, you are entitled to these advantages regardless of whether you live in one of the duplex’s two apartments.
Write-offs for Overhead Expenses
Although you must declare your duplex’s income, you can subtract all of your running costs as long as they are “regular and essential” in the eyes of the IRS. Property taxes and interest, as well as essential services and upkeep, are all part of your operational expenses. You can also deduct management fees, a portion of your telephone bill if you use it to make rental calls, and even travel expenses if you don’t live at home.
A duplex building can also be depreciated by the IRS, so allow your CPA to assist you in allocating the price of the property between the structure and the land to drop in value. Simply divide the cost of the property by 27.5, the IRS’s estimate of the building’s life cycle. After then, you can recover that amount every year for the next 27 years, with a half-year discount in the 28th year. This lowers your duplex’s taxable income without requiring any out-of-pocket expenditures.
Losses from Inactivity
You may end up with a taxable loss on the property due to the option to deduct depreciation and other delicate costs like building-related travel and cellphone consumption. The IRS may allow you to deduct those losses from your return’s on other income and if your modified adjusted gross is less than $100,000, you can deduct your real losses up to $25,000 per year from your income.
Shelter for Capital Gains
If you sell an investment property for more than its depreciated basis, you will often have to pay both capital gains tax on your income and Section 1250 recapture tax on your accrued depreciation. Because a duplex is a capital asset, you can perform a tax-deferred exchange by using the profits of the sale to purchase another one. A 1031 exchange, on the other hand, allows you to carry your basis forward and avoid paying taxes until you sell the property or until the rule changes.
Duplex with a Single Owner
From a tax standpoint, nothing much changes if you live in one half of a duplex. You have two homes. The half that you live in is considered a personal dwelling, whereas the half that you lease out is considered an investment property. This has various advantages such as splitting combined expenditure equally between your unit and your tenant’s unit. For instance, if you pay $50 per month for a shared Internet connection with your tenant, half of the cost is tax-deductible. Because you’d be spending $600 per year on your Internet connection anyhow, deducting $300 is a benefit.