I sold my half share of a owner-occupied duplex last year to other co-owner via quit claim. I am reporting the sale & have questions re: business % use changes, quit claim/settlement, and my sales price vs original basis.

[Eclipse2024]

For all time of ownership (2008 - 2023) one unit was primary residence/home (35%) and the other unit was a rental (65%). In 2008 I set up cost basis w/ 65% business usage and TT properly populated the building depreciation for the rental portion). I've always entered expenses/income under the 65/35 split or 100% if all rental.

FIRST ISSUE - Business % use and depreciation. This year I noticed the rental property had 80% business use listed instead of 65%. I reviewed previous returns and I've been mistakenly reporting 80% vs 65% since 2015(!). The total depreciation deduction I've taken from 2008 - 2022 does match what TT shows for prior depreciation. I have changed to 65% for this year (2023) and I will report the sale as a split 65/35 for rental/home. All depreciation taken in those years will be recaptured. Will it be a problem with the IRS that the average of the bus use reported over time doesn't match the 65/35 split I report for the sale, or that I changed that back to the correct/original 65% this year? Do they even care if I'm recapturing? Is there anything else this affects? I would prefer not to have to go back and amend previous years or hire someone to file a 3115, if at all possible. Looking for the easiest legal way to be done with it.

2nd ISSUE - Quit Claim & Legal Expenses. I filed an action to partition in 2020 and we ended up settling outside of court in 2023. He paid, I quit claimed to him, case was dismissed. No mortgage so no bank settlement sheet, all I have is the PTTR which reflects sales price accurately. First, does a quit claim affect anything at all regarding how I report the sale (or anything else I should be aware of)? Secondly, can I claim 65% of my legal fees as closing costs? Legal services were necessary to recover my investment/equity, produce taxable income, deal with management of the rental property and co-owner's harassment of the rental tenants. I consider fees I paid from 2020 - 2022 are gone/lost; I am only referring to fees paid in 2023. I originally deducted these fees under rental expenses but read that was no longer allowed so included them in closing costs.

3rd ISSUE - Sales Price vs Cost Basis I'm confused about how to report my sale after reading this discussion with @AmeliesUncle (https://ttlc.intuit.com/community/tax-credits-deductions/discussion/tax-year-prior-to-2020-rental-pr...). In 2008 my purchase price (116750) was half of a 233,500 city assessment, which I used to set up depreciation basis but FMV was 258,500. That was the correct way to set that up. But when reporting my sale, am I allowed to use something other than original cost basis I set up for depreciation purposes? Am I able to use 2008's FMV as my basis which would result in less gains? Is that accurate and legal? If so, I assume the only way to do that would be to close out assets as personal property then report manually in Sale of Business property, correct? Which maybe I need to do anyway because of accidental varied business use?  I'm very confused why/when you would use original purchase price vs. FMV in determining cost basis for reporting the sale. I want to pay what I owe but don't want to raise flags or questions. Ready to be done with this chapter of my life and I don't need a problem with the IRS.

Thanks for helping me!

[DianeW777]

The answers are entered below per issue:

1. FIRST ISSUE - Business % use and depreciation:  You will use all depreciation you actually deducted when entering your sale because it is required.  You used the depreciation to reduce income, therefore you must recapture the full amount.  Form 3115 is not necessary in the year of sale, it would create income and the recapture of all the depreciation will handle that.
2. 2nd ISSUE - Quit Claim & Legal Expenses: You can add the legal fees paid in 2023 as sales expense or as a deduction on Schedule E. What kind of rental expenses can I deduct?
3. 3rd ISSUE - Sales Price vs Cost Basis: The correct way to set it up was your actual original cost basis and assume this is what you indicate and this is your cost basis for sale. No, you cannot use something other than your original cost and you cannot use fair market value (FMV) as your cost.
   1. There are only a few times FMV is used for property is:
      1. When property is converted to a rental and the FMV is lower than the actual cost.
      2. When property is inherited.  Cost basis is the FMV on the date of death.

[Eclipse2024]

Thank you!

Just to double check, for legal fees incurred from prior years related to the rental portion/partition, I can't claim those in 2023 and would I have to go back to amend deductions in prior returns if I wanted to claim those, correct?

[ThomasM125]

You are correct, you can only deduct expenses in the tax year they were incurred.