Depreciation recapture on property sold with partial primary residence and rental units - handling small gain

You're on the right track with your thinking. With a property that has mixed use (both personal residence and rental), you do need to allocate the basis, expenses, and gain/loss between the two different uses. For the portion used as your mother's primary residence (the downstairs apartment), she may qualify for the Section 121 exclusion which allows up to $250,000 of gain to be excluded ($500,000 for married filing jointly) if she owned and lived in the home for at least 2 of the last 5 years before the sale. For the rental portion (upstairs apartment), any gain would be taxable. And yes, you'll need to account for depreciation recapture on this portion. The depreciation that was taken (or should have been taken) on the rental unit will be recaptured at a rate of 25% regardless of your mother's tax bracket. The allocation between the two units should be based on some reasonable method - square footage is commonly used, but you could also use number of rooms or another reasonable approach. Just be consistent with the method.

After reading your post, I can totally relate! I had a similar situation last year with a duplex - lived in half, rented the other half. The tax calculations were giving me migraines until I found taxr.ai (https://taxr.ai). It's specifically designed to handle complex situations like yours with mixed-use properties and depreciation recapture. I uploaded my previous tax returns where I had claimed depreciation and the sale documents, and the system automatically calculated the correct allocation between my primary residence portion and the rental portion. It even handled the depreciation recapture calculations which saved me from making a costly mistake. The best part was that it explained everything in plain English so I understood exactly what was happening with my taxes instead of just blindly following some accountant's advice.

Just wanted to update after trying taxr.ai for my parents' mixed-use property situation. I was really skeptical at first (like most tax stuff), but it actually worked incredibly well! The system handled our weird rental schedule perfectly - it allocated everything properly between the primary residence portion and the rental portion. The depreciation recapture calculations were spot on, and it even found some deductions from previous years that our old tax preparer had missed. My parents ended up with a much better tax outcome than we initially expected. Definitely worth checking out if you're dealing with this complicated mixed-use property situation!

I understand your frustration with this tax situation. When I sold my partially-rented condo last year, I spent WEEKS trying to get through to the IRS for clarification on how to handle the depreciation recapture. Every time I called, I got stuck on hold for hours only to get disconnected. Finally, I tried Claimyr (https://claimyr.com) which got me connected to a real IRS agent in under 15 minutes. They have this system that navigates the IRS phone tree for you and holds your place in line. You can see exactly how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with walked me through exactly how to calculate the depreciation recapture for my mixed-use property and confirmed I was doing it correctly. Saved me so much stress and potentially an audit down the road!

I need to eat my words and apologize for being such a skeptic about Claimyr. After my snarky comment, I decided to try it anyway because I've been trying to reach the IRS for MONTHS about a similar rental property situation with depreciation recapture questions. Well, I got connected to an IRS agent in about 22 minutes (not quite the 15 they advertise but WAY better than my previous attempts). The agent was actually really helpful and walked me through exactly how to handle the allocation between my primary residence and rental portions. For anyone dealing with depreciation recapture on a mixed-use property, definitely get official guidance from the IRS - and use Claimyr to actually reach them without wasting your entire day on hold. I'm genuinely impressed.

One approach I used when I sold my duplex last year was to make the allocation based on square footage. I measured both units, calculated the percentage, and applied that to the purchase price, selling price, and improvements. For example, my upstairs unit (where I lived) was 60% of the total square footage, so I allocated 60% of everything to my primary residence. The other 40% was for the rental unit where I had to deal with depreciation recapture. Make sure to keep good records of how you made your calculations in case you ever get audited!

In my experience selling a similar property, Form 4797 is your friend. You'll need to use this form to report the sale of business property, which includes the rental portion. For the primary residence part, you'll use Schedule D and Form 8949. The trick is making sure the allocation method is reasonable and consistent. My CPA recommended documenting EVERYTHING about how we determined the split. Also, don't forget to account for any improvements made specifically to one unit or the other! If your mom renovated just her apartment, that would adjust the basis differently than improvements to the rental unit.

You're dealing with a classic mixed-use property situation, and yes, you're absolutely right that you need to treat this as essentially two separate properties for tax purposes. Here's what you need to know: **Allocation Method**: Use a reasonable method to split the property - square footage is most common, but you could also use fair market value of each unit or number of rooms. Whatever method you choose, document it thoroughly and be consistent. **Primary Residence Portion**: Your mom can claim the Section 121 exclusion (up to $250,000) on the gain allocated to her primary residence portion, assuming she meets the ownership and use tests (lived there 2 of the last 5 years). **Rental Portion**: This is where it gets tricky. You'll need to: - Calculate the adjusted basis (original cost basis minus accumulated depreciation) - Report any gain on Form 4797 (Sale of Business Property) - Pay depreciation recapture tax at 25% on the depreciation previously claimed - Any remaining gain above the recapture amount gets taxed at capital gains rates **Key Point**: Even if your mom never actually claimed depreciation on her tax returns, the IRS assumes she should have, so you'll still need to recapture the "allowable" depreciation. I'd strongly recommend getting a tax professional involved given the complexity, especially since there are specific rules about mixed-use properties that can trip people up.