Just to clarify, I understand they are treated differently for tax purposes. But do you understand the situation I am describing here? When I sold the property, I received one sale price, with no way of knowing how much value was given to the rental unit vs. the side I lived in. For example, and am exaggerating here, but say each side was split 50-50 per square footage. I purchased the property for 100K, and poured 100K in renovations into the side I lived in, and nothing into the rental unit. I then sold the property containing both the rental and personal units for 500K. When you calculate the cost basis of the rental unit, with a 500K combined sale price, you end up with 250K-50K and show a gain of 200K. But for the personal side, you would end up with 250K-50K-100K(for renovations) = 100K gain. That is clearly not fair for the rental side, because it doesn't consider that I put 100K in renovations that would have clearly led to the 500K sale price. If I had not put in those renovations into the personal side, I would probably have sold it for say $425K, and then my gain on the rental unit would have been $425Kx50% - 100Kx50% = $162.50. Which would mean the renovations I did on the personal side have led to 200K-162.5K = $37.5K in additional gain subject to the investment property capital gains. How can that be right?
