@dsteele139 Example 5. In January 2008, you bought and moved into a 4-story townhouse. In December 2010, you conver-ted the basement level, which has a separate entrance, into a separate apartment by installing a kitchen and bath-room and removing the interior stairway that led from the basement to the upper floors. After you completed the conversion, your townhouse had a rental unit that was separate from the part of your house used as your home. You lived in the first, second, and third levels of the town-house and rented the basement level to tenants until De-cember 2012. You claimed the allowable depreciation of $2,000 for the basement apartment. You sold the entire townhouse in December 2012 for a $16,000 gain.
Your records show the following.
Purchase price…………………….. $ 96,000
Improvements (kitchen and bath in rental)……. 4,000
Depreciation (on rental) ………………. 2,000
Selling price ……………………… 124,000
Selling expenses …………………… 10,000
Because you met the ownership and use tests for both the rental apartment and your residence, you can claim an exclusion for both parts. However, because they are sep-arate units, you must allocate your basis, selling price, and selling expenses between them. You start by finding the adjusted basis of each part. You determine that three-fourths (75%) of your purchase price was for the part used as your home and one-fourth (25%) was for the rental part.
This can go on forever, because there a rule for if you occupied that space for two years prior to sale or on the year of sale you can exclude the gain. Morale of the story you will need to complete the appropriate schedules to show the different results and for best tax position.
Hope this helps!!!
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