determining basis and sale price of apartment when selling principal dwelling

In New York State, if a few years ago I modified a principal dwelling to form a separate apartment, and if I declared income from renting that apartment, and if I then sell the property, how can I establish the value (basis) for the part of the property that is rental and the part that is principal dwelling, and how can I then separate capital gain or loss on the sale.

When you showed income from renting the apartment, you should have deducted depreciation for the portion of the dwelling devoted to rental purposes. The proportion of the dwelling used for rental is the proportion of the total value of the dwelling you should assign to the rental portion.

If you sell the entire property you should consider the transaction as the sale of two properties. The sale of the part of your property used for business or rental is reported on Form 4797. For all the information you need on this, see Property used partly as your home and partly for business or rental during the year of sale under Business Use or Rental of Home in chapter 2 of IRS Publication 523, which you can download for free at the IRS site at: http://www.irs.ustreas.gov/forms_pubs/index.html