Basically, report the sale per the below, in the Rentals & Royalty Income (SCH E) section of the program. Also, the fact you lived in it for 4 years doesn't matter. You must have lived in the property for at least 24 months (730 days) of the last 60 months (1826 days) you owned it, counting backwards from the closing date on the closing statement you received when you sold the property. Note that the 24 months do not have to be consecutive either.
So for example, if you sold the property on July 1 2017, that would mean you had to have lived in the property as your primary residence from July 1, 2012 to June 30 2014. With my dates, if you moved out on June 29 2014, then you do not qualify for the capital gains exclusion.
Assuming you do in fact qualify for the exclusion, I would not expect the difference between your purchase price and FMV upon conversion to make any difference, and for you to still be well under the $500K threshold for the capital gains exclusion.
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 ahve a selection on it for
"I sold or otherwise disposed of this property in 2017". Select
it. After you select the "I sold or otherwise disposed
of this property in 2017" 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 it it's zero. Then you MUST work
through the "Sale of Assets/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. Likewise if
you sold at a loss then you must show a loss on all assets, even if that loss
is $1
Basically when
working through an asset you select the option for "I stopped using this
asset in 2017" 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.
