Have you been filing Schedule E and taking depreciation (for personal use rental it's possible that you may not be able to take depreciation)? If no, then the loss is not deductible. If yes, then the loss is not deductible, but because of depreciation you might have a gain. I could be wrong though.
The house should have been treated as 50% rental all along. If the two family building had similar sq ft for each dwelling unit, 50/50 it is. In which case, as you suggest, half hit schedule E, took depreciation, thereby lowering basis each year. A 20K loss may or may not be enough to negate the lower basis as OP didn't state how long property was owned.
The portion of the loss attributable to the rental portion is deductible. The portion of the loss attributable to the landlord's home is not deductible. It is possible (because of depreciation of the rental portion - as noted by removeps) that the rental portion will have a gain while the personal use portion will have a non-deductible loss.)
It likely the IRS will assume depreciation this whether you have been filing Schedule E or not. Its not a choice. You can amend filing to get the generous landlord tax benefits for the past three years at least.
There are special rules for a dwelling unit used for business and pleasure. From the Schedule E instructions
Line 2
If you rented out a dwelling unit that you also used for personal purposes during the year, you may not be able to deduct all the expenses for the rental part. ?Dwelling unit? (unit) means a house, apartment, condominium, or similar property.
... ...
If you checked ?Yes? and rented the unit out for at least 15 days in
2010, you may not be able to deduct all your rental expenses. You can deduct all the following expenses for the rental part on Schedule E.If any income is left after deducting these expenses, you can deduct other expenses, including depreciation, up to the amount of remaining income. You can carry over to 2011 the amounts you cannot deduct.
It's possible that renting out the lower floor of your house qualifies for the above -- that is, it is a rental of a dwelling unit that is also used for personal purposes.
In any case, the quote says that even if you couldn't claim depreciation as then your rental income would be negative, it gets carried over. So I guess when you finally sell the house then you can claim the depreciation loss. Kind of confusing.
SNIPPED
TRUE, BUT - this is talking about when you share a PART of YOUR home, for instance if you have a border or rent a room and allow access to common areas - like you share the kitchen or living room.
Perhaps I misunderstood the OP, but he starts out with "2 Family House" which I took to mean its like a duplex - separate everythings. On reconsideration, I can see how it could be interpreted as "sharing" space, which is treated differently and has different limitations.
Gene E. Utterback, EA, RFC, ABA
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