How do I obtain 121 exclusion on portion of duplex?

[marinawagner]

5/8/2009- Bought duplex for $167,000
8/8/2019- Sold duplex for $265,000

5/8/2009- 8/1/2010: 100% of duplex= rental
8/2/2010- 9/7/2016: 32% of duplex= rental; 68% of duplex= primary residence
9/11/2016- 8/8/2019: 100% of duplex= rental

68% of duplex was our primary residence for 2 of the last 5 years. Thus, 68% of duplex qualifies for section 121 exclusion.

When we first bought the home it was 100% investment property, so when I began depreciating the structure I entered the cost of the building as $141,000 and the cost of the land as $26,000 (Total= $167,000). (I have depreciated 100% when 100% rented; 32% when 32% rented.)

To obtain the 121 exclusion on 68% of the duplex: In Turbo Tax, I plan to treat the two units of the property as separate entities and put 68% as primary residence sale and 32% as business sale. However- when I enter 32% of my sale price in the ‘disposal of rental property’ section it shows a loss because the ‘original cost of building’ is the cost of 100% of the building (which I entered back in 2009 and have been depreciating since) whereas the amount ‘received for building’ is 32%. This is not apples to apples and thus the “loss” that is shown is inaccurate. How do I remedy this?

Can I simply change the ‘original cost of the building’ to 32%- even though my depreciation and amortization reports over the years have always shown the original cost as 100%?

[ReginaM · Accepted solution]

You may need to get a little creative in order to have this transaction reported correctly to the IRS.  This is my suggestion:

For more information here is a link to IRS Publication 523 for the Sale of your home.  Here is a link to IRS Form 4797 Instructions, Sale of Business property. 

[marinawagner]

Thank you! Those are essentially the calculations I was planning on doing. I suppose my main concern is whether I can change the ‘original cost’ of the structure to 32% of what it has always been- or if that would cause problems or red flags somewhere. 

The only way Turbo Tax will show the original cost at 32% in the ‘disposal of assets’ section is if I change the ‘original cost’ in the depreciation section.  However- I’ve always had 100% of the cost of the duplex there and I’m not sure if changing that original cost in the depreciation section could cause any problems or red flags. 

[AmyC · Accepted solution]

Changing the basis amount will not be a red flag. The goal is to report the correct numbers. You may have to change several things to get the end result to be correct. If you change the percentages, just be sure to change the depreciation. Review your paperwork and make sure the numbers are correct before submitting and you will be fine.