The adjusted basis for you is the basis that you paused depreciating mentioned earlier. 2) When you converted the rented portion to personal use, there is no gain/loss or depreciation recapture, but when you dispose of the property, both depreciation ( before  personal use and after)  will be recaptured.

It was a HUD home and my intent was to rehab it, live there, and sell it 2 years later and escape the capital gains.

@Kenny Lee was the 12k profit before capital gains?

Whatever they think you have done would have to be worth the legal costs to try to recover.

There are several legal concerns with your proposed business model which should be reviewed by a local attorney before you begin leasing.

Account ClosedNice to see you participating in the forums ... and the small step forward of dropping one of your frequent {stuffed} keywords from your post.The handling of a squatter vs a tenant will undoubtedly differ with jurisdictions, so the ultimate advice is to consult your legal counsel on the matter.The crucial distinction - at least here - that that a squatter had no legal right to be at the premises and is essentially in trespass / illegal possession of the property.  

As far as I know the same LLC would have to purchase the new property to avoid capital gains tax. 

it's not the zoning you're changing but the legal usage btw.

Also I am not quite familiar with this 2 out 5 year living and selling strategy, does one have to sell within the 5 years to not pay taxes on gain?

Under Alabama law, Tina now has all the legal responsibilities a landlord has, including the responsibility to make repairs, etc.I strongly discourage people from entering into subtenancy relationships.