@ehoffman1
I have not attempted to use Turbotax for rentals,
@Carl
@Critter-3
What I would have done is list unit 1 as an individual 100% property, rather than listing it as a 50% property. That way, you could have added unit 2 as a separate property with its own basis. To my way of thinking, the percentage method would be more appropriate for when you rent a room of your house, rather than a unit in a multi-unit building. So I can't help with adjusting the percentage.
Form 3115 would be the correct way of correcting the HWH to take the the safe harbor (on 50% of the cost). I just don't think it's cost-effective to do so at this point, especially if it is 8 years old already. Whenever you replace it, you will be able to roll up the remaining depreciation.
"When I originally entered depreciation information, I used the full cost basis (100%) of the house"
Did you reduce that by the value of the land? Because land doesn't depreciate. Suppose the duplex cost $100,000 in 2016, but the fair market value of the land was $10,000 (that is something a real estate agent could tell you, or possibly the county tax assessor). You would only list the home for depreciation at $90,000. If you listed the duplex at full price including the land, that is a mistake that should be corrected with a form 3115 and it will be important to do so because you have been overstating your deduction and understating your income for the last 8 years and that is an audit issue if the IRS ever figures it out.
"I have seen some posts that recommend taking the original asset out of service..."
That addresses the problem of having a split asset. By default, half the HWH is a separate asset, and the other half is incorporated into the overall basis of unit 2. That means that when you next replace the HWH (2028, given an estimated 12 year life), you would "roll up" the remaining depreciation on half the HWH, but the depreciation that is built in to the cost basis of unit 2 never comes back to you until you fully depreciate unit 2 (27 years from now, 35 years after buying the duplex in 2016). If you remove the HWH from unit 1 and then add it back to the whole duplex, you do have to start over at a new 27.5 year calendar (using the present FMV), but when you next replace it, you can roll up the remaining depreciation on the entire thing instead of half. (I would also try and verify whether 27.5 years is correct. A stand alone appliance like a washing machine would have a shorter lifespan. Because the HWH is attached to the home, it may be correct to use 27.5, but I would double check. And no matter the length of time, you get the roll-up whenever you replace it.)
