Hello,
I have an interesting situation which might affect other people, but I've never seen the issue addressed.
Think about a 120 year old duplex. I have owned it for 30 years, so the whole thing has been remodeled. The upstairs apartment has a pretty classic layout with wood floors. It's a typical apartment, so in 30 years the floors were resurfaced once and the kitchen and bathroom have been updated with nice, but apartment quality stuff.
The downstairs, where I lived has been totally upgraded with custom cabinets, custom flooring, a wall was torn out to create an open floor plan with a breakfast bar. The basement was totally finished, drywalled, carpeted, etc. The "home" portion of the property may have gotten $40,000 of remodeling in 30 years, while the "rental" part of the property may have gotten $5000 worth of remodeling. The square footage of the rental portion is 35.5% of the house.
The IRS instructions say to allocate 35.5% of the sales price to the rental, but only the $5000 of increase to the basis. Obviously, this is not a fair allocation since most of the increase of the home's value came out of the significant changes to the "home" portion of the property. In this situation, am I allowed to take 35.5% of the full $45,000 of remodeling against my "rental" portion of the property? Even this way would overstate the gain attributable to the rental portion. Is there more than one way to allocate changes to basis? What is considered a fair method in a situation like this?
I appreciate any and all input. Thanks for reading!
