Two in one

DEAR BOB: I bought a two-family duplex house in 1985. I lived in one side and rented the other side to tenants. Now I have the property listed for sale. I moved out about a year ago. Both sides are currently rented to tenants.

What about capital gains when I sell? I've always taken the depreciation tax deduction on the rental side. Now my CPA is depreciating both sides. When I sell this property, I want to set the money aside and buy another property in the near future. How long can I do so without owing tax on my profit? -- Cathy T.

DEAR CATHY: For tax purposes, the sale of your two-family duplex property is really two sales. If each side is comparable, then you can split the gross sales in half. However, if each unit is substantially different, then you should obtain a professional appraisal to allocate the sales price between the two "sales."

Capital gain on the sale of the rental side is potentially fully taxable. However, it can qualify for an Internal Revenue Code 1031 tax-deferred Starker exchange.

To qualify, the sales proceeds for that side must be held by a third-party intermediary accommodator, such as a bank or title company, beyond your constructive receipt. You then have 45 days to designate a qualifying replacement property and 180 days to complete the acquisition of another rental or investment property.

As for the sale of your former personal residence side, if you owned and occupied it an "aggregate" two years out of the last five years before the sale, it can qualify for up to $250,000 of tax-free home-sale profits. If you are married, up to $500,000 can be tax-free. However, the rental depreciation that has been claimed during the last year will be "recaptured" and taxed at a 25-percent federal tax rate.

For more details, see your tax adviser.

Beware of tenancy-in-common apartments

DEAR BOB: I am considering buying one unit in a six-unit tenancy-in-common apartment building. As I understand it, there is one mortgage on the building, and each owner is a tenant-in-common with the other owners. Each owner has the right to occupy a specific apartment.

The "converter" developer is living in and owns one of the apartments. So far, the other five are vacant. These apartments have been listed for sale several months. What do you think of this arrangement? -- Royce G.

DEAR ROYCE: Please be extremely careful. Buying into this situation could be quite troublesome if you decide to resell your apartment in the future. The prime reason is it is impossible to obtain an individual mortgage since you will be a tenant-in-common with the other co-owners.

Should one of the co-owners fail to pay their share of expenses, the others must make up the deficit or risk foreclosure of the entire building. I do not recommend buying a tenancy-in-common apartment.

Send questions to Robert Bruss, 251 Park Road, Burlingame, CA 94010 or www.bobbruss.com.

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