Sales of 2 family house that is partial investment and partial primary home

[ccthealias]

I have a 2 family house that I have sold. Unit 1was mostly rental and  units 2 was mostly primary use.  The unit that is primary, I have lived there 3 years and rented 2 years.

I have split the cost and sales value into 2 and when I entered unit 2, It seems that I don't need to pay any capital gains since it was a primary home but also it didn't ask me for depreciation on the 2 years that was rented out. Do I need to include that in the depreciation in Unit 1?

[pk]

@ccthealias  as I understand the situation:

 (a) you have owned a duplex for five years ( at least ) and composed of unit A and Unit-B

(b) Unit has been always a rental unit and therefore  reported on Schedule-E every year and depreciation recognized.  Now it has been sold, you report this sale on form 4787, and on to Schedule-D -- for capital gains treatment.  Note that   that portion of the gain that is due accumulated depreciation needs to be treated as ordinary gain and not capital gain.

(c) Unit B was a rental property for the first two years and recognized on Schedule-E including depreciation ( accumulated  ) for those two years.  Now it has been sold and you meet the gain exclusion  eligibility  ( of  US$250,000 ), i.e.  at least two years of ownership and  730 days  total of  main residence usage  within the last five years.   However, your basis in the property is reduced  by accumulated depreciation allowable during its rental period and the gain is affected.  Again not that that portion of the gain that is due to the accumulated  depreciation, is treated as ordinary gain.

Does this help ?   Is there more I can do for you ?

[ccthealias]

Yes that makes sense .

I also made capital improvements like renovation, roof, brick tucking, external stairs.  I believe I can add those expense to the cost basis.  How do I apply those across the 2 units when one is treated as business and the other treated as primary.

Also Unit 1 and 2 are not equal, the Unit 2 (primary residence is bigger and has a garage) so the value is closer to 70/30 than 50/50.  However, in the past when I did depreciation I had assumed 50%.  Does that mean I have to stick with 50/50 split in calculating how I would split the sales and cost of the building?

[pk]

@ccthealias , the simplest would be to leave the  cost basis in line with the depreciation -- to correct the situation would be a lot of work and may actually  be  detrimental ( tax wise ) but legally correct  ( because you would have to redo all the depreciation computation and amend a few returns.)  My suggestion would be to try it out both ways and see the impact and then decide whether to "let sleeping dog....." or take curative action.

Good Luck