2 out of 5 years rule entry....Please help!

[johnstonjk123]

I lived in a property for 2 years, then converted to rental for next 2 years.  Sold property and know I qualify for capital gain exemption, except for recapturing the depreciation.  Trying to enter into TurboTax, but system keeps showing long term capital gains as rental property and not exclusion as homeowner.  What the heck am I doing wrong?  Can anyone walk me through the entry process for converted rental property that is sold mid year, but qualifies for 2 out of 5 year exemption?  Been trying to get to work for 2 days.  Thanks a TON! 

[Anonymous_]

Hopefully, you are entering this transaction in the Rental Properties and Royalties section of the program.

If not, please state how you are entering this transaction. If so, then you are likely missing the screen below.

[Carl]

This should help.

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.

[johnstonjk123]

Thanks so so much for replies.  I will take another shot at it in the morning.  

[johnstonjk123]

Do I also need to enter information into the "Sale of Business Property" section since I qualify for the 2 out 5 year home gain exclusion...or is it automatically taken care of in Turbo Tax?   Will TurboTax automatically calculate the depreciation recovery and tax appropriately, or do I need to do something there?  Thanks again.  I am new to Turbo Tax but learning thanks to you all. 

[Anonymous_]

If this is your first year using TurboTax, @johnstonjk123, you will have to start from scratch, but you will start in the Rental Properties and Royalties section.

[johnstonjk123]

Yes I entered everything intoRental Properties and Royalties section.  Seemed to go well based on kind instructions from this thread.   However, do I now need to make any entry of information into the "Sale of Business Property" section...or "Sale of Home" section...or is it automatically taken care of in Turbo Tax and I am done?   Will TurboTax automatically calculate the depreciation recovery and tax appropriately, or do I need to do something there?  Thanks again. 

[Anonymous_]

TurboTax should handle the transaction properly, in the Rental Properties and Royalties section, provided your entries are accurate.

There should be no need to enter any figures in other sections of the program.

[Carl]

If you have entered anything into the Sale of Home (Gain or Loss) section of the program, delete it. You only enter the sale *one time*, in the rental section of the program.

[Hal_Al]

I find that the interview goes more smoothly if you enter this as the sale if your main home, rather than entering it as the sale of rental property.  The home sale interview will allow you to enter the depreciation recapture, for the rental period.

Beware of one tricky question in the interview. In TT, at the page where it asks if you had any other use of the home it says: "Note: if you used your home for reasons other than primary residence, after it was no longer your primary residence, select 'no' ''.

[Anonymous_]

If the transaction is entered as the Sale of (a main) Home when the last use was for rental purposes, the user must still go through the Rental section and enter income and expenses, plus indicate that the property was taken out of service as a rental during the tax year (indicating that the assets have been taken out of service as well).

Further, entering the accumulated depreciation in the Sale of Home section requires knowing the exact figure, which would include the depreciation deduction for the tax year of the sale.

I believe, but could be mistaken, that the recommended approach is to enter the transaction, in one section or the other, based upon the last use of the property (e.g., as a home for personal use, in the Sale of Home section; as property for rental use, in the Rental section).