Tenants in common sale of principal residence (2+ years) converted to rental property

[Shiloh2]

I bought my home as tenants in common with my sister and parents in 2017. I had 50% ownership interest, parents 30%, and sister 20%. It was agreed between us that I would take all of the depreciation for the rental portion. We purchased the home for 1,650,000, put in 200,000 in improvements, and sold it for 2,350,000 in 2021. My sister and I lived there as our principal residence and rented out part of the home for the first 3 years. For the last year before sale, we rented out the entire home. Just prior to the home sale in 2021, our parents gifted their 30% to my sister so we both had an equal 50% interest at the time of sale.

Where do we enter the sale of the home in TT and do we split all of the costs in two in terms of the cost basis?

[Mike9241]

It was agreed between us that I would take all of the depreciation for the rental portion. I'll bet the IRS doesn't agree with this approach even though ownership was TIC. every one of you needs to see a tax pro to go over this situation.

[AmyC]

Amend before doing this year. You  essentially had a partnership with your parents and sister. There are regulations regarding special allocations and substantial economic impact. These laws are complicated and I would bet you did not have an operating agreement. You should all amend all returns from 2017 forward in order to file 2021 correctly. Any amounts due will be owed with interest while any refunds from 2017 will be disallowed. In order to get a 2018 refund, the amended needs to be filed before April 15, 2022 or it will also be disallowed. You all need to have sch E with rental income and expenses divided as your ownership percentages. Then, you and your sister will note the sale of the rental. Your parents will have a disposal of the rental the year they gifted it. Since over the allowed gift limits, your parents will also have a gift return to do.

Please:

• Save a copy of the original return before doing an amended return.
• See how to file an amended return.
• Follow your amend at track an amended return 
• See  I need to amend my state return.
• I recommend mailing with tracking to ensure safe delivery. Each year must be mailed separately.

[Carl]

It was agreed between us that I would take all of the depreciation for the rental portion.

I seriously doubt the IRS will agree with this. All of you have a major tax issue here. All of you need to seek professional help yesterday, if not sooner. Expect fines and penalties to be imposed. A tax professional can help keep those costs to a minimum. So a tax pro will be well worth the cost.