When you sell rental property at a gain, you *WILL* pay tax on the recaptured depreciation no matter what. There's no way out of that. Recaptured depreciation is not included in the "lived in 2 of last 5" exception. Additionally, you won't qualify for any exception anyway, unless you stop renting the space and convert it back to personal use at least 2 years before you sell the property.
" I probably need to add the new building as an improvement to existing rental property entry, instead of making a new one."
Yes, that would most likely be the easiest way to go. Then you declare the new building as 100% business use, provided of course you do not utilize it for one single day for personal use of any type. I believe that by adding it as an asset/property improvement, the program will have no issues dealing with the splits for all the allowed/deductible expenses that way.
Of course, for the 2018 program you want to check absolutely everything. With the massive tax law changes, there's no way to say for sure what won't be touched, and what won't turn into a nightmare. 🙂
