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We have owned the property for about 8 years, reporting income, depreciation etc. on Schedule E. We have been evenly splitting the income, expenses, and deductions between ourselves and our daughter.

Now we are going to buy our daughter out. If I understand correctly, she will report the sale of her half and recapture the depreciation etc.

Yes, but if you've only owned the building for 8 years, the depreciation should have all been straight-line. Therefore, there wouldn't be "recapture" which is reclassifying capital gain to ordinary income, except for any personal property involved. The gain on the real estate should be capital gain. However, the depreciation amount, though still treated as part of the capital gain, is a "nonrecaptured Section 1250 gain" and may have a maximum tax rate of 25% instead of 15%.

If she, like you, has been using Turbo Tax, it can do this quite well; but you do have to eyeball-check the flow of the figures from Form 4797 to Schedule D to the tax computation worksheet for capital gains & qualified dividends.

How do we report the acquisition of the other half of the property? Again, if I understand correctly, that half starts depreciating anew, like a new purchase. Do we keep treating each half of the property separately on our tax returns? I use Turbo Tax Premier and I don’t see where or how this kind of a transaction gets addressed.

Yes, on your depreciation schedule, you just add a new asset, for the 2nd half of the building. The part attributable to land, of course, is not depreciated.

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