For the first time in years, many Minneapolis and St Paul duplex owners are asking themselves, “What are my tax consequences if I decide to sell?”
After all, an investment property’s increase in value may trigger capital gains tax, not to mention the challenge of depreciation recapture.
While everyone’s situation is different, and a consultation with your accountant is a critical step before selling, there are some basic options duplex sellers can take to help reduce potential tax obligations.
Selling On A Contract For Deed (Land Contract) – In this case, the duplex seller basically acts as the bank for the buyer. Typically, the buyer gives the seller a down payment, who then carries the loan for a pre-determined amount of time (usually 2-5 years) at a higher interest rate than banks are charging. At the end of that time, the buyer agrees to refinance, paying the seller off in full. This helps duplex sellers spread their tax liability over several years and strategize on how best to reduce their tax obligations.
1031 or Starker Exchange – This allows for a property owner to sell one property and exchange it for another, provided the owner adheres to very specific and strict guidelines. The qualifying property may be another single family home or duplex, something larger, an oil well or the property owner may even exchange into something called an UPREIT, in which the owner joins forces with other investors, jointly owning other properties.
It’s important to note the duplex seller is only taxed on the cash they touch. Therefore, it’s crucial to know all of your options before you decide to sell.