@Carl ok Carl here is what I am finding out.......form 4797 has to have land and the structure separated out.....when selling a rental that has a structure and land associated with it. The prorated land portion which in my case I used 26.5% for land and 73.5% for the structure. Part I of 4797 needs to have the land amounts placed on it and Part III of 4797 needs to have the section 1250 filled out for the recapture portion of the gains which is the depreciation. So TT is not doing it correctly when your FMV is less than the purchase price even though IRS Publication specifically tells you to do this in PUB 527 here is the quote on page 15 of 2020 Pub 527
Figuring the basis. The basis for depreciation
is the lesser of:
• The fair market value of the property on the
date you changed it to rental use; or
• Your adjusted basis on the date of the
change—that is, your original cost or other
basis of the property, plus the cost of permanent additions or improvements since
you acquired it, minus deductions for any
casualty or theft losses claimed on earlier
years' income tax returns and other decreases to basis. For other increases and
decreases to basis, see Adjusted Basis in
chapter 2.
For me I used my tax appraisal of that year.....someone may say that is low but I did not have an appraisal so I went with that number which at the time was probably not far off because the Albuquerque Real Estate Market was terrible one of the worst in the country. Anyway back to form 4797 when I do it your way it fills out lines 20-24 in Part 3 but does not place the depreciation in Section 1250 for recapture. But if I try to force it through the schedule E sale in TT and force the original purchase price to match what I paid in 2007 is recalculates my depreciation basis and increases that which is a wrong number. I have some capital loss carry over that is lower the capital gains anyway. So here is my numbers.....
Original Cost: $280,000
Land: $74,200
Structure: $205,800
Sale Price: $289000
Land: $76,585
Structure: $212,415
FMV in 2014 when entered into service: $205,000
FMV of land: $54,500
FMV Structure: $150,500 (Depreciation Basis)
Method 1: When I use $280,000 in schedule E input area of TT it increases my depreciation for 2020 (because it uses $205,800 as a basis and not $150,500) for 6 months which is about $1,100 too high but it fills out for 4797 correctly (Part I land and Part III structure with section 1250 filled out). This also calculates my capital gains correctly.
Method 2: Use the sale of business or rental property portal in TT using the correct purchase price of $280,000 plus the settlement statement realtor commission fees and the sale price of $289,000. I also place my depreciation in this area too.....which based on my FMV $150,500 for 6.5 years is $31,914. This calculates my gain correctly and provides the correct depreciation in schedule E for calculating those costs. However, either way TT is messing this up. I guess I go with Method 1 to high of a depreciation and correct form 4797 or Method 2 correct schedule E with correct depreciation and incorrect form 4797. But based on my capital loss carryover if I do use Method 2 I think that the actual tax amount is pretty close and it appears I am getting a refund. Method 1 my refund is approximately $200 higher than Method 2 mainly due to my schedule E being $1,100 more than it should be.
