1.(a) Exclusion
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.[only half of your sale proceeds will be a 121 exclusion]
https://www.law.cornell.edu/uscode/text/26/121
2.When you live in half of the property and rent out the other half, the IRS treats the duplex as two separate properties. It requires you to allocate costs between the two halves, so you will claim half of your mortgage interest as a deduction on your Schedule A while you claim the other half as a rental property expense on Schedule E.Since your duplex gets treated as two properties, only half of your sale proceeds will be subject to taxes.[depreciation is recapture at a rate of 25% ]
3.When you change property you held for personal use to rental use (for example, you rent your former home), the basis for depreciation will be the lesser of fair market value or adjusted basis on the date of conversion. [i.e. personal losses are not allowed]
Property Changed to Rental Use
https://www.irs.gov/publications/p527/ch04.html#en_US_2016_publink1000219148
4.What is a simple entry in Turbotax becomes rather complex when the taxable classification is changed.
It will be easier in the future to do the allocation to personal and rental now and enter the duplex as two separate properties with the correctly calculated basis for each.
