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Sale of rental property that used to be primary residence

Forum|Forum|7 years ago
June 1, 2019
8 replies
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I have a question about how to claim the sale of my rental property. Here's the timeline.

I purchased the house in March of 2006 for 171,500. It was my primary residence from March of '06 until I converted it to a rental in October of 2013. Since the FMV at the time of conversion of 114,000, I was required to take the lesser of FMV or purchase price for depreciation.

It was kept as a rental up to it's sale date in October of 2015, for 148,000. It's my understanding that it wasn't sold at a loss or a gain since it sold at less than the original purchase price, but more than what it was appraised at during in-service date. Any guidance would be appreciated. Thanks.

TurboTax Premier Online

Best answer by TaxGuyBill

You are correct, there is no gain or loss. However, TurboTax is not set up very well to report this.

In most cases, the sale of Rental Property is sold in the rental section and you sell the 'asset' of the house. However, if the property was originally a personal-use property and it converted to a rental property when the Fair Market Value was less then the Cost Basis (usually the purchase price plus cost of improvements before it was a rental), it is reported in the "Sale of Business Property" section.

Go into the "asset" for the property in the Rental section, and indicate that you sold it. When you get to the screen that asks about "Special Handling", say YES. Then it will ask you to enter the date of the sale (do NOT enter the sales price).

Now figure out how much depreciation you took on the property, including the current year. It may be helpful to print out the 'Depreciation and Amortization' worksheet (you will need to pay before you print it). It is the side-ways worksheet.

Then go to "Sale of Business Property". If it was sold for less than the 'Fair Market Value when converted to a rental', you would say No, it was not sold at a gain, then on the next screen, yes it was sold at a loss.

However, in this situation there is not a gain or a loss. To property report this, we sort-of need to 'make up' the "basis". For your 'basis' you enter the total of (1) Sales Price plus (2) total depreciation plus (3) $1. Then enter the actual Sales Price and the Depreciation where it asks for them. That should give you a $1 gain and put it on the proper form (that section won't allow a $0 gain/loss).

EDIT: Edited to add the $1 because the "Sale of Business Property" section will not allow a $0 gain/loss.

C

cjjqcps

Level 2

I have a similar situation but can't find any IRS info that supports the "no loss or gain since it sold at less than purchase price but more than what it was appraised at during in-service date". Can you elaborate on this?

P

PhilC42

Level 2

I have the same situation & question.

S

seszorcsik

Level 2

IRS Treatment is clear - See p. 4 of IRS Publication 544.

Now, as to how to get TurboTax to report it correctly....

M

mostlywind

Level 2

IRS Publication 551, page 10, explains how to calculate the gain/loss. Nowhere does it say the answer is "no gain" I don't see that in Pub 544 page 4 either.

B

bellinr99

Level 2

where does p4 of IRS Publication 544 support the "no gain provision?" I have the exact same situation. It would be common sense that any gain relative to FMV at the time of conversion that was less than the purchase price would be excluded, I just don't see where specifically. The only exclusion appears to be if the property was not rented for 2 of the last 5 years. Any help would be appreciated!

S

selwynaccounting

Level 2

Hi guys it's in PUB 544, on page 4.

Gain. If you have a gain on the sale, you generally must recognize the full amount of the gain. You figure the gain by subtracting your "adjusted basis" (price you paid plus improvements) from your amount realized (sale price), as described earlier.

What this means is that you only pay a gain if your sale price is more than the price you paid (not FMV at the time of conversion).

But in order to take an ordinary loss on your return, you may be excluded from doing this if the FMV was less than your adjusted basis at the time of converting your rental.

I hope that helps.

T

TaxGuyBillAnswer

Level 13

You are correct, there is no gain or loss. However, TurboTax is not set up very well to report this.

In most cases, the sale of Rental Property is sold in the rental section and you sell the 'asset' of the house. However, if the property was originally a personal-use property and it converted to a rental property when the Fair Market Value was less then the Cost Basis (usually the purchase price plus cost of improvements before it was a rental), it is reported in the "Sale of Business Property" section.

Go into the "asset" for the property in the Rental section, and indicate that you sold it. When you get to the screen that asks about "Special Handling", say YES. Then it will ask you to enter the date of the sale (do NOT enter the sales price).

Now figure out how much depreciation you took on the property, including the current year. It may be helpful to print out the 'Depreciation and Amortization' worksheet (you will need to pay before you print it). It is the side-ways worksheet.

Then go to "Sale of Business Property". If it was sold for less than the 'Fair Market Value when converted to a rental', you would say No, it was not sold at a gain, then on the next screen, yes it was sold at a loss.

However, in this situation there is not a gain or a loss. To property report this, we sort-of need to 'make up' the "basis". For your 'basis' you enter the total of (1) Sales Price plus (2) total depreciation plus (3) $1. Then enter the actual Sales Price and the Depreciation where it asks for them. That should give you a $1 gain and put it on the proper form (that section won't allow a $0 gain/loss).

EDIT: Edited to add the $1 because the "Sale of Business Property" section will not allow a $0 gain/loss.

P

PhilC42

Level 2

Does this also remove other assets (improvements) that were added to the property (such as new carpeting throughout)? Or do I need to file that as a separate item? (It was added several years ago, and has been depreciated a lot.)

K

Kev27

Level 2

I purchased a condo in 2006 for 142k. I lived in it until August 2014 and immediately started renting it 9/1/2014 because the value was horrible and I still owed over 100k. I never moved back in it. I listed it for sale in June 2021 after learning my renter was not renewing. My renter left middle July 2021 and until the sale closed for 120k in September 2021 I never moved back in the unit.

My FMV for tax purposes was set in 2014 at 101k (95k for the unit and 6k for the land). Not sure how to go forward, but the steps in TT Premier are not generating a Form 4797. I'm pretty I at least have depreciation recapture, but TT is not populating it when I put in the figures. Any suggestions on how to manuever through TT Premier to accurately record the data? Thanks for any assistance

DaveF1006

Level 15

Yes, there should be depreciation recapture. Let's see if you did the right steps.

if using Turbo Tax Online, navigate in the rental section where it says Here's single family's rental property info. Scroll down the page until you see the button that said sold rental property. Should be under the expenses. Select start or edit.
First screen should say your property assets. Here select edit next to your property.
Next screen says Tell Us About This Rental Asset
Here record the cost that you paid for it including the land. Your cost is going to be different than the FMV you listed above but you can use the same ratio to allocate the cost of the building to the land when you first bought it.
Next screen, tell us more about your rental asset. Here you will say that the item was sold....Then you you list the date the house was sold. Also in the same screen, it will ask if you used the house strictly for business, you will say no, you did not use this 100% of the time for business.
Then you will check that you used this for personal reasons prior to using it for business.
Then you will put the date that you used this for business, meaning the house was ready to rent on this date. then it asked the percentage of the time you used it in 21021, you will say 100%.
Next screen will say Confirm Your Prior Depreciation. Here is the depreciation amount Turbo Tax calculates for you based on the time you put your rental into service until you sold it
After you are done with this, for 4797 should show up in your forms. If you are in Turbo tax Online, go to tax forms>forms>delete a form>check to see if Form 4797 shows up. Don't delete it!!
Let us know if this works.

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K

Kev27

Level 2

It's actually the turbotax premier for PC and not online. If you have the instructions on how to properly record rental income in premier that would be great!