Deductions & credits

The best way to handle sale of rental property is to use the Rental Section. 

It is a little tricky.

First enter any 2022 expenses and income for the rental. 

If you have not used TurboTax for the rental in the past, you will need to enter that information

Select that the property was sold. 

The next screen will ask for rental days and personal days. If you never used it as your personal residence in 2022 enter zero for personal 

Finish the interview concerning 2022 income and expenses. 

GO BACK to that section and say Yes, you want to review

Answer the screen asking about Real Estate Professional, chances are you are not one. 

Continue

CLICK EDIT next to the property on the following screen. 

NOW scroll down to Sale of Property/ Depreciation 

Select YES I want to go to my asset summary

If the rental was not previously entered into TurboTax, you will list the building and land 

Here you will report the purchase price, the sale proceeds and Deprecation you took (or should have taken)

Selling rental real estate usually results in two types of income

DEPRECIATION RECAPTURE  which is Ordinary Income and Capital Gains. 

How this is computed is you figure the "adjusted basis" which is your basis (cost) minus depreciation. Doesn't matter if you ever took depreciation, the IRS thinks you should have either way. 

The sale proceeds minus this adjusted basis is your Capital Gain

The amount of depreciation you now need to "pay back" is ordinary income. 

Say you bought a house for 210,000

Land was 10,000 (land does not depreciate)

You took, (or could have taken) 80,000 depreciation. 

You sell for 320,000.

Land is now worth 20,000 so there is a 10,000 Capital gain for the land

That leaves 300,000 toward the building. 

Adjusted basis for building only is -

200,000 - 80,000 = 120,000

300,000 - 120,000 = 180,000 gain, 80,000 is Depreciation recapture and 100,000 is again Capital Gain 

TOTAL 

80,000 Ordinary Income 110,000 Capital Gain 

IRS LINK