In 2007 I sold my first home and bought a lot with an old house for $365K. Demolished it and in it's place built a 2-family as my new primary residence.
The original plan was to keep one unit for myself and to sell the other one.
But due to the market conditions I decided instead to rent the other unit. Last year I put it back on the market and sold it. The sale closed this January.
The sale price of the unit was $720K. The cost of the entire construction (including initial acquisition), plus improvements over the years was $850K+.
The other unit remains my primary residence. The condo conversion took place just before the sale.
How do I report capital gains/losses for this sale?
Thanks.

since you have a rental as part of your primary residence or run a business out of a portion of your property, your ability to maximize your capital gains exclusion largely depends upon whether the rental was part of your home (in the same dwelling unit) or a separate part of your property (a separate building or apartment). If the business use of your home was contained within your dwelling unit then upon sale you will need to recapture any depreciation taken for that part of the home. But you will not lose any of the allowable capital gains exclusion ($250k for single taxpayers and $500k for married filing jointly). In your case since the rental use of your home was not a part of your dwelling unit then you need to bifurcate the sale by allocating the basis of the property and the amount realized upon its sale between the rental part and the part used as a primary home.Remember, only one home can be sold in any 2 year period unless you and your spouse live apart, and even then you can each only take the single payer exclusion of up to $250k. I guess this is not your case however just for reference, for examp[le, say but what if you need to sell a home that you have not lived in for the full 2 years? The IRS tells us that in special circumstances you can sell a home before you reach the two year mark and get a pro-rated exclusion. An example of a pro-rated exclusion is, for example, if you are a single taxpayer and have to sell your primary residence for a qualified reason after living in it only one year than you could exclude up to $125k. In other words, you lived in the home 50% of the requisite time so you can take 50% of the allowable exclusion. The special circumstances that qualify you for this safe harbor and allow you to take the pro-rated exclusion have to do with health (yours and certain qualified individuals such as close relatives), change of employment or what the IRS calls ?unforeseen circumstances? (examples include death, natural or man-made disasters, multiple births form the same pregnancy, divorce) These circumstances also have to cause you to sell your home.

Thank you so much!