1099-S Received for Sale of Rental Property

[kmhunt78]

I received a 1099-S for the sale of my rental property that included all of the rent paid for previous years. Basically, the property was always a rent-to-own situation with a family member.  Due to an unforeseen circumstance, the family member had to instill the help of an attorney to deal with an issue involving a neighbor.  The attorney drew up paperwork to make the rent-to-own situation more formalized.  This action led to me receving a 1099-S for the total sale price of the house, which included all of the rent amounts that the family member had paid in previous years, which had already been claimed on the appropriate years' tax returns when they were filed.  Since the 1099-S includes all of the previous rent paid, it now makes it seem like a made a $40,000+ profit on the house when that is not the case at all.  How can I reduce the amount reported on the 1099-S by the rent already reported on previous year's tax returns?  Am I able to enter the previous rent received under Miscellaneous Expenses in turbotax or somewhere else to offset what has already been reported previously?

[DaveF1006]

There are precise steps of reporting you need to do in this case to make sure the tax return is correct. Follow these steps.

1. Open your return and go to the Federal tab. 
2. Select Wages & Income.
3. Scroll down to Rentals, Royalties, and Farm and click Start/Revisit next to Rental Property and Royalties (Schedule E).
4. Answer Yes that you have rental income.
5. If you have already entered the property in prior years, click Edit next to the property. If not, set it up as a "Single Family Home."
6. Before reporting the sale, you must account for any rent received in the current tax year before the sale closed.
7. Enter any rental income received in 2025/2026.
8. Enter your normal expenses (taxes, insurance, mortgage interest) up until the date of the sale in this section. 

 On the "Property Profile" screen, check the box that says "I sold or otherwise disposed of this property in 202X." This is where you address the $40,000 discrepancy.

1. Navigate to the Assets/Depreciation section within your rental property.
2. Select the Rental House asset (the building itself) and click Edit.
3. Follow the prompts until you see "Did you sell this asset in 202X?" and select Yes.
4. Sales Price: Enter the amount from your 1099-S
5. Sales Expenses: Enter your closing costs (commissions, legal fees from the attorney, title fees).
6. To prevent double-taxation on that $40,000, here is how to enter the cost basis of the house.

• When TurboTax asks for the Cost of the property, you usually enter what you originally paid.
• To offset the 1099-S, increase your Cost Basis by the $40,000.
• Example: If you bought the house for $100,000 and the 1099-S is "inflated" by $40,000 of old rent, enter your cost as $140,000.
•  This cancels out the $40,000 on the 1099-S so your "Gain" is calculated only on the true appreciation of the home. 

Just one last thing I need to mention. TurboTax will automatically calculate Depreciation Recapture. Because you've been renting the property, the IRS "recaptures" the depreciation you took (or should have taken) over the years. This is taxed at a maximum rate of 25%.

Even if the $40,000 adjustment makes it look like you didn't have a "gain" on the price, you will likely still owe some tax on the depreciation you claimed in previous years. I just want to make you aware of this.

[kmhunt78]

Thank you for your reply!  So I am using the desktop version that I downloaded to my computer, so I am not sure if the steps are a bit different, but I think I know where you want me to change my cost basis.  I just want to confirm though since the desktop version does not ask me for my cost basis.  I can see my property in my Asset Summary under "Your Property Assets".  Here I can click on the Edit button and that takes me to a "Review Information" screen which lists the cost I originally put in for my property.  Is this where I should increase the cost basis to offset the prior years' rents that are included on the 1099-S?  I originally considered changing my cost on this screen, but when I clicked on the Learn More link, I saw the following message:  

Changing Prior Year Asset Information

The only time you should change any prior year asset information is if it does not accurately reflect the information in your prior year return, or if your business use drops to 50% or less.

I wasn't sure if I should still change it based on this message.  If you could confirm whether that would be the correct place, I would appreciate it!

[DaveF1006]

Yes. This is the spot where you need to change it. The message you saw is a general safeguard. Usually, if you change an asset's cost, it messes up the depreciation calculations from prior years. However, you aren't changing the history of the asset for fun. You are adjusting the Adjusted Basis to account for a specific tax reporting anomaly (the 1099-S including rent).

If you don't change it, you will effectively be double-taxed. because if you don't add that amount to your cost, the IRS will see it as part of your "Sale Price," and you’ll pay capital gains tax on it again. 

[kmhunt78]

Thank you for confirming!  I will make that change to offset the prior years' rents paid that was included on the 1099-S.  I really appreciate your help!