Hello James,I am retired USCG.I have used my VA Loan twice now and its an amazing tool to get property with very little money down and start gaining that equity.It has been amazing at how my wife and I went from being first time home buyers to now owning several properties in Oceanside.

My question is: How do we legally structure the partnership to reflect the ownership (20/80)?

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.