How to enter inherited 2 family home 1/2 is personal use and 1/2 rental

[sacap]

In 2024 we inherited a 2 family home. One unit is rented at fair market value. A family member lives in the second unit rent free so it is considered personal use by us. We plan to sell it this year. When entering in the fixed asset information in the desktop rental property section, should I just enter 50% of the land and building adjusted basis and 100% of the expenses and have TT apply a 50% personal use percentage? That way TT only calculates depreciation on the rental portion of the home. I am familiar on how to adjust any expenses that may be 100% allocated to the rental activity in the schedule E worksheet.

Then when we sell the property enter 50% of the 1099s amount as sale of the rental property and 50% as sale of a personal residence at which time we will enter the basis for the personal portion? Basically treating the house as two separate properties for tax purposes the entire time. I am thinking about how the IRS may match up the 1099s amount to the return. Perhaps they only look at totals and not individual entries.

We don't plan to rent the unit where a family member lives.

Thank you

[KrisD15 · Accepted solution]

There are a couple ways to do what you want to do. 

The first thing you needed to have done was get the Fair Market Value on the date the original owner passed. That is your "basis" value which the capital gain (if any)  will be based on.

If you are treating the unit the family member lives in as "not for profit" and they pay no rent, enter half the value for the property and half the (total duplex) expenses for the rented section. Since there is no rent income for the family half, there would be no expenses to claim for that half. 

When you sell and you are using TurboTax, you would first enter the remaining rental income and expenses for 2025.

Keep a copy of the depreciation schedule/worksheet for 2024 and 2025 while it was your rental in order to have the amount of depreciation claimed. 

I suggest indicating that it was converted to personal use rather than enter the sale in the rental section since you split the rental in half. 

Once the Schedule E for the rental has been closed, go to "Sale of Business Property"

Here you can report the sale as one sale.

Enter the cost as the fair market value on the date of passing and be sure to select that depreciation had been taken. 

Enter the depreciation claimed in 2024 and 2025 (if any in 2025) 

(You have no choice about taking depreciation while it is a rental) 

Enter the full amount of the 1099-S for the sale proceeds less selling costs.

Capital gain is the amount over the Fair Market Value and is taxed at the capital gain rate.

Depreciation Recapture is "paying back" any depreciation taken that you get back when you sell. 

Example, the duplex is worth 570,000 on the date of passing. That is your basis.

Half is worth 285,000. You value the land for the rental at 10,000 and half the duplex at 275,000.

The rental is depreciated 10,000 for the year you rent it. 

The market does not change and you sell the duplex for 570,000

You have no capital gain, but you do have 10,000 depreciation recapture. 

If you sell for 570,000 and pay 6,000 selling fees (commission) your depreciation recapture would be 4,000 with no capital gain. 

If you sell for 570,000 and pay 34,200 closing fees (6%) you would have a 24,200 loss.  

When you use sale of business property, you would not split the proceeds between land and building, you would lump everything together. 

I am under the impression this family member lived in half the duplex when it was inherited. 

If not, and you and your family uses it since after you inherited it, then it might be better to treat half the duplex as your second home. 

HERE is a thread about renting not for profit

HERE is a thread about renting out only half a duplex

[sacap]

This is exactly what I was looking for.

We did have a certified appraisal done as of the date of death. Yes, another family member was living with the deceased owner and continues to live there.

Thank you