Now, I assume you got the tax year right and we are "in fact" talking about tax year twenty twenty three, for which the TurboTax program for 2023 does not yet exist.
In TT 2023, on the "Was This Property Rented for All of 2023" screen, I will answer "No, this property was not rented all year" because it was never rented out for even one day in 2023 (it was sold on 1/10/23). I will also enter Days rented = 0, Personal use = 0.
If you don't enter at least 1 day rented, the program will force you to delete the property entirely. There's nothing wrong with entering 1 day rented with no rental income reported for the tax year, as anyone would assume the rent for that 1 day was per-paid before the new year; meaning it was paid last year and included in the 2022 rental income you reported. I just wonder if the IRS computers would flag anything because it was only rented 99 days in 2022. That's why I say just convert it to personal use on the 2022 tax return and be done with it. Otherwise, if you report it on the 2023 tax return, you'll still need to convert it to personal use with a conversion date that is the closing date of the sale so you can get the correct amount of depreciation to recapture when you report the sale in the Sale of Business Property section.
And lastly, for the box that says "I did not rent or attempt to rent this property at all in 2023," I will check that box because it's a true statement.
That will one hundred percent, force you to delete the property from your tax return entirely, and you'll lose everything including all your PAL carryovers and depreciation history. Don't do that.
Does everything that I've stated here seem correct for what I should enter into TT 2023?
Again, this is why you should convert the property to personal use on your 2022 tax return. Even if you want to make the conversion date Dec 31, 2022. Then you'll still have 99 days rented with 0 days personal use. To me, that would be more acceptable a reason why a property improvement that was completed 6 months prior, was never placed in service and depreciated. On top of that, an asset that is placed in service and removed from service in the same tax year, is not required to be depreciated anyway. That's the justification for not entering them on the 2022 return in the assets/depreciation section.
As a reminder (can't recall if I mentioned this earlier in this thread):
Two things about depreciation recapture.
- Recaptured depreciation is added to your AGI in the tax year of the sale. This has the potential to bump you into the next higher tax bracket. So if you're already in the 12% bracket, that jump to the 22% bracket "will" be felt. Weather this happens to you or not, just depends on the numbers. But it's a fair bet that with the realized taxable gain on the sale, chances are good you'll be in the next higher tax bracket for the tax year you close on that sale.
- Recaptured depreciation is taxed at the "ordinary" income tax rate, anywhere from 0% to a maximum of 25% But still, if your "other" ordinary income with the gain bumps you into the 32% bracket, that's what you'll pay on the amount over that threshold.
This is why I prefer to keep my depreciation as low as I legally can.
