Basis for depreciation and capital gains for primary residence converted to rental property

[kaidad63]

We purchased a single family residence in 1995 for $122,500 and lived in it until 2009.  We did make some significant improvements to the property when we lived in it from 1995 to 2009 but don't have exact numbers or full receipts. In 2009 we converted it to a rental when it had a FMV of $217,000.  We did make some improvements during the time we held it as a rental (approximately $5,000 for flooring, which we do have full receipts for) We sold the property in 2016 for $280,000 and are (Still!) trying to complete the 2016 taxes for this.  There was no personal use of the property after the conversion from a primary residence to a rental in 2009. How do I determine the basis for capital gains and report the sale in TT home & business? When we go through the steps to show the sale under "Sale of Property/depreciation" section, it appears the capital gains is calculated on the basis of the original $122,500 purchase price in 1995, not the FMV of $217,00 in 2009 when we converted it to a rental. Is this correct? 

[AnnetteB6]

It does sound correct.  

Here is an explanation from another TurboTax agent (see this question:(

When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.

Now that you are selling, it gets a little trickier.

Calculating Gain/Loss on Subsequent Sale of Rental Property

If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.

 If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property

[scraper822]

I just need to DELETE a replication of a mortgage rental deduction and I can get this program to do it.

What should I do ? Does it have something to do with being qualified? It's one deduction too many. Items, I am trying to get rid of, keep coming back. Very Frustrating!

[JamesG1]

At the screen Report Mortgage Interest under the rental property, are you able to delete the Lender Name and Interest Paid?

Did you unclick the boxes below titled I paid more mortgage interest than is shown on my form 1098 and I also paid mortgage insurance on my form 1098?

[Carl]

gains is calculated on the basis of the original $122,500 purchase price in 1995, not the FMV of $217,00 in 2009 when we converted it to a rental. Is this correct? 

That is 100% correct. That's because when you converted it to rental property, depreciation is based on the "LOWER" of what you paid for it, or it's FMV on the date of conversion. Since what you paid for it is the lower value, depreciation is based on what you paid for it. Yes, it's that simple. It's FMV on the date of conversion does not come into play for "anything".  So your cost basis on the property is $122,500 for "everything".

Property improvements add to your initial cost basis. It does not matter when those improvements were done either - be it before or after you converted to rental. It still adds to the cost basis of the property.

Property improvements are added in the assets/depreciation section and get depreciated over time. For the improvements you mentioned, "new flooring) does without question, add to the cost basis of the property because it clearly meets the IRS definition of a property improvement (included below)

If you have property improvements that were done prior to 2016, then you need to include IRS Form 3115 with your 2019 tax return to report and show the depreciation you "should" have taken on those property improvements. TurboTax does not support the 3115, and that form is not simple by any stretch of the imagination. It requires professional help. So basically, in order for you to report things correctly, you just can't use Turbotax for your 2019 tax return. You need to seek the services of a tax professional. This is doubly important if your state also taxes personal income.

[Carl]

gains is calculated on the basis of the original $122,500 purchase price in 1995, not the FMV of $217,00 in 2009 when we converted it to a rental. Is this correct? 

That is 100% correct. That's because when you converted it to rental property, depreciation is based on the "LOWER" of what you paid for it, or it's FMV on the date of conversion. Since what you paid for it is the lower value, depreciation is based on what you paid for it. Yes, it's that simple. It's FMV on the date of conversion does not come into play for "anything".  So your cost basis on the property is $122,500 for "everything".

Property improvements add to your initial cost basis. It does not matter when those improvements were done either - be it before or after you converted to rental. It still adds to the cost basis of the property.

Property improvements are added in the assets/depreciation section and get depreciated over time. For the improvements you mentioned, "new flooring) does without question, add to the cost basis of the property because it clearly meets the IRS definition of a property improvement (included below)

If you have property improvements that were done prior to 2016, then you need to include IRS Form 3115 with your 2019 tax return to report and show the depreciation you "should" have taken on those property improvements. TurboTax does not support the 3115, and that form is not simple by any stretch of the imagination. It requires professional help. So basically, in order for you to report things correctly, you just can't use Turbotax for your 2019 tax return. You need to seek the services of a tax professional. This is doubly important if your state also taxes personal income.

[Carl]

Property Improvement.

Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must add "real" value to the property. In other words, when  the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.