Basement Rental Depreciation as part of Primary Home

[yinglam]

We sold our home in 2020 and had been rented the basement over the years.  There were times when the depreciation was not allowed to be deducted as losses for a given tax year.  How can I figure out or calculate the correct recapture depreciation so that I would factor in the amount that was disallowed?  

[Carl]

You don't change the prior depreciation figures what-so-ever. When reporting the sale, you recapture all depreciation taken. Period. You also claim the passive activity loss carryovers which are on the form 8582. It all works out in the wash.

It's also perfectly possible that you may not have any carry overs. With the tax law changes of 2018, if you were "actively involved" in the rental activity then once your deductible rental expenses get your taxable rental income to zero, you can deduct up to $25K of the excess losses from other ordinary income. Provided of course, you have that other ordinary income to deduct it from. Being able to do that for 2018, 2019 and 2020 it's perfectly possible you have no carry over losses now. So don't be surprised in there's no 8582 in your 2019 or 2020 tax return.

[yinglam]

Thank you for the information.  May I ask where I get to input or claim the passive activity loss?  Do I simply subtract the passive activity loss from the accumulated appreciation when input the recaputure depreciation?  Or is there a different spot that allow me to input the passive activity loss?

[Carl]

If you just work through the SCH E section of the program the way it's designed and intended to be used, and read the information presented on each screen as well as make the proper selections where applicable, the program will walk you through the entire process. But if you haven't taken depreciation for the last 5 years, it's not going to work out for you correctly, the way it otherwise would.

With having rented a part of  your primary residence over the years, combined with not having depreciated the rental portion as required, that adds to the complexity of the situation and the TurboTax program just flat out can't handle or deal with it correctly.

[yinglam]

Thank you for the response Carl.  I did not have an input for this property under schedule E, since it was not rented in 2020.  I also did not have it on Sch E for 2018 and 2019, since I stopped renting the basement as of 2018.  I tried adding my primary home that I sold in 2020 to Sch E and here is what I run into:

1.  I selected that I sold the property.  When I got to the page to input "Passive Losses from Prior Year," it has three boxes -- Schedule E regular tax Carryovers, AMT Carryovers, and QBI carryovers.  My carry over losses from as well as the portion un-allowed up until 2017 are shown on form 8582 worksheet, not Sch E.  Sch E only shows the amount allowed to be deducted for 2017.  Please verify that it's the 8582 carryover amount that I need to input here.  And do I have to put in AMT and QBI carryovers as well?  I really don't know where to find those figures.

2.  When I clicked through to the last page where it asked, "Was This Property Rented for All of 2020?" I had to select "I did not rent, nor attempt to rent, this property at all in 2020" because as I mentioned, I stopped renting my basement since 2018.  It then showed a message saying "since this property was not a rental at all in 2020, you should delete it as a rental. Make sure to keep your complete return, including the Depreciation Report for this property, from 2019 (or the last year this property was used as a rental).  And when I clicked "continue," Turbo Tax removed this from Schedule E that I just inputted entirely.

Please advise what I should do in this case.  Were you suggesting that TurboTax is not capable to handling my situation properly and that I should seek other tax filing venue?  Thank you very much! 

[Carl]

I also did not have it on Sch E for 2018 and 2019, since I stopped renting the basement as of 2018.

So I assume you converted the property from rental to personal use on the 2017 return, which is fine.

My carry over losses from as well as the portion un-allowed up until 2017 are shown on form 8582 worksheet, not Sch E. Sch E only shows the amount allowed to be deducted for 2017.

Correct. I assumed you already knew the 8582 is part of the SCH E used specifically and explicitly for carry over losses on rental property.

When I clicked through to the last page where it asked, "Was This Property Rented for All of 2020?" I had to select "I did not rent, nor attempt to rent, this property at all in 2020"

That's the problem. Since the property was not a rental in 2020, there's nothing to report on SCH E concerning this property 'at all".  Assuming you do not own any other rental property, you need to completely delete the SCH E. Simply work through the Rental & Royalty Income section again, and when you come to the rental summary screen, delete the property and then *YOU MUST* finish working through the section in order for your deletion of the property to "stick".

You'll report the sale in the "Sale of Home (Gain or Loss) section, and (I can't reiterate this enough) read the small print, read all of the small print, and read all that small print on every single screen *before* you enter any data or make any selections. I see folks mess this up quite frequently, because they do not read the small print.

Now there is one thing that does need clarification. If you click the "Adjusted Cost Basis" link for more information, one of the things listed there that can adjust your cost basis, is the depreciation. You will adjust your cost basis by all the items listed *EXCEPT* for depreciation you took for a home office or for renting out a part of your primary residence while it was your primary residence. You'll be asked on a later screen if you have any depreciation taken after May 6, 1997. You'll answer that question YES.