We lived in half of the duplex from 2006 to Jan 2018 and rented the other half out. In Jan 2018 we moved and rented both sides out for the entire year. We plan on continuing to rent both sides until we sell the property. If we sell before Jan 2021, we will still be in the 2-out-of-5 year window to qualify as a sale of our primary residence and, I think, could exclude 50% of capital gains from taxes.
However, are there complications since we now receive rental income from both sides? Have we lost our primary residence advantage?
From: https://www.irs.gov/pub/irs-pdf/p523.pdf
Page 11: Business or Rental Use of Home
A space formerly used for business is considered residence space if ALL of the following are true.
1. You weren’t using the space for business or rental at the time you sold the property,
2. You didn’t earn any business or rental income from the space in the year you sold your home, and
3. You used the space as residence space for 2 years out of the 5 years leading up to the sale
If I sell the duplex now, then #1 and #2 are false -- We did use our unit's space for rental and we did earn rental income from it.
I found an answer in the forum for a similiar situation:
https://ttlc.intuit.com/questions/4506176-how-to-calculate-capital-gains-for-the-sale-of-a-duplex-wh...)
The answer seems to say we can still exclude 50% of the sale from capital gains tax, but it seems at odds with Publication 523 above and I don't know how to reconsile the two.
Would we still be able to exclude 50% of the capital gains as our primary residence or not?
