Part rental to primary residence to full rental

I have a unique tax situation. In 1999, I bought a two family house and rented out one of the two units and lived in the other one. In 2004, we terminated the rental and occupied both the units. In 2007, we bought a single-family house and moved there. We rented out both units in the two-family house.

During 1999-2004, I was depreciating half the house and adding capital improvements to the cost basis. Starting from my 2005 return, since the house was no longer rented, the tax software didn't prompt me for depreciation. How should I handle the 2007 return? Should I use the depreciated value as of 2004 plus the additional capital improvements in 2005 and 2006 as the cost basis of the house and start depreciating from there? Going forward, would it be easier to track the two-family house as a single property or as two separate properties? I plan to keep the two-family house as rental property for maximum of three years so I don't have to pay capital gains when I sell.

Thanks in advance for your help.

Abacus,

You are correct, your situation is unique.

The depreciation you have taken or will have taken will lower your basis in the property. And this is likely to create some capital gain.

Take a look a look at IRS Pub 523, Selling Your Home. There is much information in that pub and many specific situations are discussed. That should provide you with the guidance you are seeking.

Of course, you are always welcome to post again.