Since the unit you lived in was not your primary residence for "2 of the last 5 years" you owned it, counting back from the closing date of the sale, you don't qualify for the capital gains tax exclusion. Therefore, I don't see an issue with reporting this sale on SCH E. That is, provided everything appears under a single column on the SCH E for lines 3 through 22. Is this the case?
If it appears under 2 columns (column A and B) then you can still report the sale in the SCH E section. You'll just have to report it as two sales allocating half to each one.
So here's how to report the sale on SCH E so that depreciation is correctly recaptured and any PAL carry over losses are correctly applied to reduce your tax liability on any gain realized on the sale. A few notes first.
If you sold at a gain (I assume you did), then you must show a gain on each individual asset. Doesn't matter if that gain is $1 on some assets, and $50,000 on other assets. A gain is a gain, is a gain, is a.... you get the point.
While your gain on the sale is taxed at capital gains tax rates, recaptured depreciation is taxed at the "ordinary" tax rate anywhere from 0% to a maximum of 25%. If you sold at a gain and you show a loss on any assets, the recaptured depreciation on that asset will incorrectly be included in your capital gain and will be incorrectly taxed at the capital gains tax rate. So be aware of that.
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.
