Sale of rental property built over two years

[Texas Dave B]

i've read that a rental property built new and then sold is eligible for LTGC and STCG treatment. Any expense greater than 1 year from the sales date is eligible for LTCG treatment. Any expenses incurred within 1 year of the sales date would be eligible for STCG treatment.

As an example 

After completion the property was placed in service and had 5 weekly rentals earning a total of $2500 in 2022

This property sold for $250,000 on 5/19/2022. Settlement expenses were $15,000

The lot was bought 12/1/2019 for $50,000. Between 12/1/2019 and 5/18/2021 $25,000 was spent on beginning of construction on the building. Between 5/20 2021 and 2/28/2022 another $25000 was spent. total invested $100,000.  Building was put in service 3/1/2022 and rents received of $2500. Then the building was sold for $250,000 5/19/2022

Sales price and expenses are allocated between the land, greater than 1 year from the sales date and less  than 1 year from the sales date.

              basis                gross sales       sales expenses        net (ignoring depreciation recapture for the moment)

land       50,000            $125,000           7,500                          67,500  LTGC treatment

>1 year  25,000                 62,500           3,750                         33,750   LTGC treatment   

< 1 year 25,000                 62,500           3,750                         33,750   STGC treatment   

How should this be treated in TurboTax.

I tried entering two different assets for the same address.

The first was the greater than 1 year expenses which included the land at $50,000 and the building expenses of $25,000. In this asset TT didn't accept the land value greater than the building, depreciation was not calculated.

In the sales portion,  gross sales revenue and sales expenses were added. The net gain did not come out correctly,  TT did not accept the land value being greater than the improvement value. Result was that the $25,000 basis of the partially complete building was not deducted from the gross sales price.

The second asset was the < 1 year expenses of $25,000 . This entry worked fine in TT, depreciation was calculate  and the capital gain was correct. No depreciation is probably correct, since the building was not put in service.

Thanks for your input

In the sales portion,  gross sales revenue and sales expenses were added. That seemed to work correctly 

With this result, should the greater than one year old investment be sold using  Sales and other Dispositions of Capital Assets form 8949 to sell the greater than one year old land and building expenses.

[DianeW777]

The land gets long term capital gain (LTCG) treatment.  The cost and purchase expenses will be used to offset the selling price of the land.  The building, in my expert opinion, is one asset and the holding period would not begin until it was actually completed which would mean short term capital gain (STCG).

No depreciation is allowed for an asset that is placed in service and removed from service in the same tax year. Because of this you should enter a sale of business property, with no depreciation expense since none was allowed. 

1. Sale one is the land - LTCG
   1. Land cost basis is purchase price and purchase expenses
2. Sale two is the building - STCG
   1. Building cost basis is all the construction costs to build, including any necessary permits or city cost requirements

Note: It appears from your information the building was not completed until it was ready to rent.  Once the building was completed and available for use the holding period begins. It's one building and not two regardless of when the money was spent to begin construction.  The key is when it was completed. My advice is that the IRS will not allow two sales, one for each part of an incomplete building asset.

To record your sales in TurboTax Desktop follow the steps below:

1. Open your tax return 
2. Select the Business Tab > Business Income and Expense > I'll choose what I work on
3. Scroll to Less Common Business Situations > Sale of Business Property > Start or Update
4. Click Sales of business or rental property..... > Continue > Yes > 
5. Enter your sales information (leave the depreciation amount blank)
6. See the image below for assistance.

[Texas Dave B]

Thanks for your thoughts. The sale was a single transaction with the proceeds split between land, construction cost > 1 yr from sale and construction cost < than 1 year.

I did read a CPA’s opinion that costs could be allocated in this manner for a custom home sale. Wondering if it could be extended to a custom built rental. That opinion is below:

For purposes of this answer I assume you are not in the business of building and selling homes and that you intended this home to be your residence.

Your holding period for property that has been constructed must be split when construction began more than one year before the sale, but was not completed more than one year before the sale of the property. When the costs incurred for the components during the long-term holding period can be identified, the relationship of those costs to total costs will be used to determine the percentage of long- and short-term gain or loss.

Accordingly, if you incurred 40% of the acquisition and construction costs (including land acquisition) more then one year prior to the date of sale, then 40% of your gain is long-term capital gain and the rest is short-term capital gain. If you cannot identify which time period costs belonged, then the percentage of completion method must be used to allocate costs. This should be relatively easy in that you likely have records as to when your construction loan was drawn on.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

[DianeW777]

As you stated it is an opinion and may or may not be tested.  I can see an argument, so this is a 'proceed at your comfort level' decision, with the knowledge it could be tested. You have the opinion from this CPA to keep with your tax files.  

Here is a link to the holding period description for constructed or reconstructed property which is more in line with my previous statement.

• § 1.1250-4 Holding period. (See paragraph b(2) )
  • (2) For the purpose of determining the applicable percentage in the case of property constructed, reconstructed, or erected by the taxpayer, the holding period of the property shall begin on the first day of the month during which the property is placed in service.