When I started using TurboTax, and did the questionnaire, I put the date that i acquired the asset to the date I converted it to a rental.
That's actually wrong. The date acquired is the date your name was put on the deed. Weather or not the property was a rental at that time doesn't matter. However, there's no need to go back and correct this, because it has absolutely no bearing on any tax liability you may have incurred while you rented out the property, or when you sold it.
Now I noticed that, on the 4797 it showed a huge ordinary gain because it wasn't computing the land basis. I went back to the Asset Entry Worksheet and changed the "total cost when asset was acquired" and entered the land value under "Total amount of land included in the cost". It seems to be correct now, but did I do this correct or does this need to be changed somewhere else?
You "may" have done it right. It depends on my interpretation of your above statement. So to clarify.
COST - Here you enter the amount your paid for the property in it's entirety.
COST OF LAND - Here you enter the amount of COST that you are allocating to the land. Doing the math determines the value of the structure to be depreciated. Example:
COST: $100,000
COST OF LAND : 25,000
So by doing the math (which the program does in the background) the value of the structure is $75,000 and it's that value that gets depreciated over the next 27.5 years. If you change "EITHER NUMBER" (the COST box or the COST OF LAND box) that will throw off the value of the structure and totally screw up not only the current year depreciation amount, but the depreciation history also. Here's what I think you did.
COST: $100,000
COST OF LAND: $0
So $100,000 was set up with a depreciation schedule to depreciate $100,000 over the next 27.5 years.
Now you've gone in and changed it to read:
COST $75,000
COST OF LAND: $25,000
Now now the program will show an incorrect amount of prior year's depreciation taken. It gives you the option to change that amount. So when you entered the "correct" amount of depreciation that was actually taken, it shows you took way to much depreciation is past years and most likely is taking very little (if any) depreciation this year.
Nortmally, I'd advise you to seek professional help to file the 3115 to correct this. But since you sold the property in 2020 it's kind of a moot point really. My advice would be to "change nothing" and just report the sale "as is". That way the chances of screwing up the depreciation recapture are reduced to zero. If you go changing numbers that will affec the history, you risk screwing up that recapture requirement and getting a nasty gram along with a tax bill from the IRS.
