Sale of rental property, not allowing me to put sale price to compute capital gains

[kkarrancsu]

I am trying to report the sale of my rental property. It was rented out from 10/2013 - 07/2021.  I sold the property in 9/2021.  I was able to enter my purchase price, purchase date, and depreciation that I have taken, but am not able to enter the sale price anywhere.  

I see in the "Your Property assets" section:
"Note: Earlier you told us that you sold (disposed of) your Townhome. Be sure to enter your sales information in this section so we can calculate your capital gain or loss"

However, I don't see where to enter that information, or where to enter information regarding home improvement I did prior to the sale.  Any help would be greatly appreciated!

[Carl]

You have to work through each individual asset one at a time. Read the small print on each and every screen.

 - Did you stop using this asset in 2021?  - YES

 - Special Handling Required? - NO (If you select YES, you will not be asked for sales information)

If you have more than one asset listed in the assets/depreciation section, the below guidance will help you with sales price allocation across those assets.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[kkarrancsu]

Hi Carl,

Thanks so much for the detailed reply. I have a few follow-up questions:

1 - In the cases where it asks whether Special Handling is Required, I do meet the conditions listed there. More specifically, 2 conditions apply:

  a - The business use percentage of this asset varied during the years I owned the asset

  b - The asset was a rental, ...

So, I'm not sure how to handle that if I need to click NO to the question of "Special Handling Required?"

2 - I'm confused about the concept of "Asset" in Turbo-Tax. Based on your description, am I correct in understanding that I need to enter the same property as multiple assets? If so, would the first asset be the disposal of the rental property "with special handling," and the second asset be the same entry "without special handling?"

3 - When entering the "Cost" and "Cost of Land" fields, I can look up the tax assessment of land value for each year that I owned the property.  So, would I split the purchase price of the property between the land-value and the total purchase price, or is the original cost value inclusive?  To me, it seems like the total purchase price should be split between the cost of the structure and cost of the land. However, the description of "Cost of Land" indicates: "If the cost of this property includes the land value, enter the land value here." I interpret that to mean that the "Cost" field should be total purchase price, *not* purchase_price - tax_assessed_land_value.

Thank you again!

[Carl]

a - The business use percentage of this asset varied during the years I owned the asset

Why? I ask, because if the TTX program has tracked it correctly, then this would not apply. Why did the percentage of business use vary in some years? I also suspect you are not quite interpreting that correctly, which is quite possible based on the lack of clarity the program provides.

b - The asset was a rental, ...

Read the entire statement - not just the first four words. The last three words of the statement clarify it.

This asset was a rental, a home office or a home office improvement *WITHIN A HOME*.

So was the asset a room you were renting out within your home? Or a home office?

Now in the Sale of Assets/Deprecation section, select the asset to edit it. That first screen is "Review Information".  On that screen is the business user percentage 100%? Has it always been 100% business use since you placed the asset in service?  If not, why not?

Again, the program doesn't clarify these things. But just because it hasn't been 100% business use, does not always preclude you from reporting this sale in the rentals section. (Yes, there are some scenarios that do)

[kkarrancsu]

Hi Carl,

A - I am saying "Yes" to The business use percentage of this asset varied during the years I owned the asset question, because:

      1 - I bought and lived in the property as my primary home from 10/2012 - 10/2013.

      2 - I rented out the property from 10/2013 - 9/2021.

I owned the asset from 10/2012 - 09/2021.  The asset was used for business purposes for a subset of that time, 10/2013 - 09/2021 and was used for personal purposes from 10/2012 - 10/2013.  Based on this, my interpretation is to answer "Yes" to this question.  

To answer your question of, once the property was placed in service (i.e. converted to business use), the asset was indeed used for 100% business use case.

B - Again, probably an interpretation problem.  The statement reads This asset was a rental, a home office, or a home office improvement within a home.  My interpretation was that the qualifier *WITHIN A HOME* is only applicable to the home office improvement section.  If not, then that is one box checked and what remains is to reconcile #1 above, before deciding that "No special handling" is required.    

Thanks again for the continued help!

[Carl]

once the property was placed in service (i.e. converted to business use), the asset was indeed used for 100% business use case.

That's where the program lacks clarity. If the property was 100% business use for the entire time it was classified as a rental, then your business use percentage did not vary.  So that item does not apply to you.

Again, probably an interpretation problem.

Not just an interpretation problem, but a clarity problem too.  Some folks tend to take things to literally, and the way some screens are worded in the program, it's really no surprise. For example, "business use since you owned it" is bad wording in my opinion - and we call know what opinions are like. 🙂 It should read something adkin to "100% businses used since you owned it, *or* 100% business use since you converted it"

The fact is, based on the information you've provided, there is no special handling required. Therefore you click NO and then you will be prompted for sales information.

[kkarrancsu]

Thank you again Carl.  I agree that the wording could be made significantly clearer. I actually worked out the IRS Home Sale worksheet manually, and that was easier than filling it out in TurboTax, I'm sad to say!

Do you have any guidance regarding interpretation of this additional question?

When entering the "Cost" and "Cost of Land" information, does the "Cost" field include the total price (i.e. structure + land?).  I can look up the tax assessment of land value for each year that I owned the property.  So, would I split the purchase price of the property between the land-value and the total purchase price, or is the original cost value inclusive?  The description of "Cost of Land" indicates: "If the cost of this property includes the land value, enter the land value here." I interpret that to mean that the "Cost" field should be total purchase price, *not* purchase_price - land_value.  That's because of the word include.

More concretely, lets say when I bought the property:

Purchase Price: 100k, Tax Assessed Land Value: 25k.  The question is whether in "Cost", I put in $100k, or $75k? 

[kkarrancsu]

Digging through other forum posts, I see: https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/turbo-tax-no-longer-a...

It's unclear what "Cost" means--is it the Cost of the (Asset + Land)

Yes, the ***TOTAL*** cost you paid for that specific asset, which in the case of residential rental real estate would include the land.

[Carl]

When entering the "Cost" and "Cost of Land" information, does the "Cost" field include the total price (i.e. structure + land?). 

Yes. Generally, that will be the contract price which appears on line 101 of the HUD-1 closing statement you received at the closing, when you originally purchased the property. (Assuming you received a HUD-1 at the closing.)

More concretely, lets say when I bought the property:

Purchase Price: 100k, Tax Assessed Land Value: 25k.  The question is whether in "Cost", I put in $100k, or $75k? 

You enter 100K on the COST box. Then when you enter 25K in the COST OF LAND box, the program (not you) will do the math to establish the structure value at 75K. It's the 75K the program will figure depreciation on.

One odd thing is that when you acquire the property, at no point do you enter the cost of the structure when initially setting it up in the program. But when you sell the property, it does separate the cost of the structure from the cost of the land (as it should).

To further clarify things, since you have more than the property itself listed in the Sale of Assets/Depreciation section, I'm presenting the below. Note that capitalization and bold is for emphasizing the importance, and is not a reflection on the intelligence of anyone reading it.My depreciation numbers are bogus, because I'm not taking the time to figure them. Then to keep things simple I"m not including sales expenses. But the math is what matters here, big time.

Purchased in 2010

COST = $100,000
COST OF LAND = $25,000

In 2013 I installed a new HVAC at a cost of $7000. Set this asset up in TTX to be depreciated over 27.5 years.

At this point, my total cost basis in the property is $107,000.

In 2021 I sell the property for $200,000.

I have taken $10,000 of depreciation on the structure

I have taken $2000 of depreciation on the HVAC

LAND Sales price is $40,000.  I have a $15,000 gain on the sale of the land.

STRUCTURE sales price is $140,000. I have a $75,000 gain on the sale of the structure, and $10,000 of that gain is recaptured depreciation that will be taxed at the ordinary income tax rate up to a maximum of 25%. The remaining $65,000 of gain is SEC1250 gain that gets taxed at the capital gains tax rate.

Of my $200,000 sales price, I sold the land for $40,000 and the structure for $140,000 bringing my total to $180,00. I have $20,000 left to allocate.

HVAC sales price is $20,000. I have a $13,000 gain on the HVAC sale, and $2000 of that is recaptured depreciation which will be taxed at the ordinary income tax rate up to a maximum of 25%. The remaining $11,000 is SEC1250 gain that gets taxed at the capital gains rate.

Take note that I am showing a gain on all assets. This is important. When selling at a gain, if you show a gain on some assets and a loss on others, then the  depreciation on those assets that have a loss is not recaptured. Instead, it gets included in the SEC1250 gain, meaning it will be taxed at the capital gains tax rate.

[kkarrancsu]

There's still something incorrect going on ... By following these procedures, TurboTax is including the sale price as ordinary income.  My understanding is that roughly, sale-purchase price is taxed at a capital gains rate, not income tax .. 

[Carl]

Depending what what the final AGI will be once you have completed the return in it's entirety, it's perfectly possible for the tax rates to be the same for your specific scenario. So you really can't make a final determination until the return is completed and ready to file.

Remember, the program can only work with the numbers "at this specific point in time". As you enter other numbers for income, expenses, deductions, exclusions, etc, things will change. I guarantee it.

[kkarrancsu]

Alright, I'll run through the whole thing before I draw further conclusions 🙂

One additional question in the Home Sale: 

Was this asset included in the sale of your main home?

My interpretation of the TTX help here is that I should answer Yes only if I rented out part of my home.  In my case, I rented out the entire home so I should answer No and report the sale of the property as the sale of a business property, not as "Sale of my home." Is that interpretation correct?

[Carl]

Was this asset included in the sale of your main home?

That relates to the "2 of last 5" capital gains tax exclusion. Basically, if the property was your primary residence for 2 years of the last 5 years you owned it, counting back from the closing date of the sale, then your first $250K of gain on the sale is tax free.

To be more precise, if the property was your primary residence for 730 days or more, of the last 1826 days you owned it, counting back from the closing date of the sale, then your first $250K of gain on the tax is tax exempt. ($500K if married filing joint and both of you lived in the house for the required time.) Note also that the 730 days do not have to be consecutive days, so long as all days it was your primary residence, was within t he last 1826 days you owned it.

So if it wasn't your primary residence during the prescribed time frame, just answer NO.