How to record the sale of my rental property that used to be my primary Residence

[Nick]

I purchased the property in March of 2006 for 428,000.  It was my primary residence until I purchased a new home and converted it to a rental in January 2013.  Since the FMV at the time of conversion was 292,000, I was required to take the lesser of FMV or purchase price for depreciation.  It was kept as a rental up to its sale date in April 2017, for 335,000.  Depreciation for 2013 through 2016 and 1st qtr 2017 Totals  around 26,840.  I know the percentage Cost/Land breakdown (78.78%/21.22%), but it’s giving me a gain since it sold at less than the original purchase price, but more than what it was appraised at during in-service date.

How do I enter these values in TurboTax 2017, so it doesn’t give me a gain?

Thanks – Nick

[Carl]

Because your FMV at the time the property was placed in service, was less than what you paid for the property originally, you can't report the sale in the Rental & Royalty Income (SCH E) section of the program. You have to report it in the "Sale of Business Property" section.

First, work through the Rental & Royalty Income (SCH E) section of the program. Indicate at the start (I think it's like, three screens in) that you "coverted the property to personal use" and just keep working it through. When you get to the Assets/Depreciation section work through each asset one at a time to indicate you converted it to personal use *ON THE CLOSING DATE OF THE SALE*. Make sure you use that same date for any and all assets listed.

Of course, as you're working through each asset you'll need to write down and keep track of prior year's depreciation and current year's (2017) deprecation on each asset, as you'll need that info for proper reporting of this sale in the Sale of Business Property section.

If you claimed any vehicle use for this rental, I seriously doubt you sold the vehicle as part of the rental sale. So just indicate it was removed for personal use, and you'll be fine.

Now you'll report the sale of your rental property in the Sale of Business Property section using the original purchase price, and all that prior/current year's depreciation you wrote down.

Any further questions, then by all means please ask. If you do ask more questions, please let me know if you are using TurboTax online, or the CD version of TurboTax that you physically installed on your computer.

Do note that if you qualify for the "lived in two of last five years" capital gains exclusion, you need to pay close attention to details and the small print on each screen as you work this through the Sale of Business Property section. So long as you make the right selections, you will be asked questions to confirm with the program that you do "in fact" qualify for the exclusion.

Most likely, if the property was your primary residence for 2 of the last 5 years you owned it, counting back from the closing date of the sale, then you will only qualify for a partial exclusion since you have what is referred to as "unqualified use" after 2008.