Investors & landlords

When you sell rental property at a gain, you are required by federal law to recapture all depreciation taken on all assets and pay taxes on it in the year of the sale.

Now the TurboTax program has it's own quirks. Basically, if you sold the property at a gain, then you ***MUST*** show a gain on every single asset - even if that gain on some assets is only $1. If you do not do this, then you risk the program reporting the sale *INCORRECTLY* as the program may *NOT* catch the error, because mathematically, there is no error to catch. Sometimes it catches it. Sometimes it doesn't. Just depends on the numbers.  Examples:

Example 1: (my numbers are not accurate, but picked out of "thin air" to make a point.)

You paid $100,000 for the property 10 years ago. When you set it up on your taxes you allocated $30,000 to the land and $70,000 to the structure. Since land is not a depreciated asset, the structure value of $70,000 was depreciated over a 27.5 year depreciation schedule.  In 2019 you sold the property for $150,000.

Depreciation already taken: $35,000. This makes your "adjusted" cost basis in the structure $35,000 while your cost basis in the land is still $30,000 since the land is not depreciated.

When allocating your sale price, the amount you allocate to the structure "must be" at least $1 moe than your "original" structure value of $70,000. This is to allow for the "correct" recapture and taxation of the recaptured depreciation.  So here's a possible way to allocate the sales price.

Structure sales price $75,001

Structure sales expenses $5000

Gain on sale of structure after subtracting sales expenses: $1

Add to the gain the recaptured depreciation and the gain is $35,001

Land sales price: $74,999

Gain on sale of land determined by subtracting original cost of land $35,000 from sales price of $74,999 and the taxable gain is $39,999

Total taxable gain which includes the recaptured depreciation is $75,000.

Exampe 2: (with an incorrect allocation of sales price)

Structure sales price $70,000

Structure sales expenses $5000

Gain on sale of structure after subtracting sales expenses: No gain. There's a $5000 loss.

Add to the gain/loss figure the recaptured depreciation and the gain is $30,000

You have $5000 of depreciation that has "not" been recaptured. While this may or may not generate an error for you in the TTX program, it will most definitely raise flags at the IRS.

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  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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 2019" 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.