Complex Rental Property Sale

[TillerF15]

We have had a rental property for 20+ years. I'm retired military and we were moved overseas while owning the house. We rented the property for many years and have a large passive carryover as well as depreciation. Since we were military, we could use the additional years for the qualifying 2 years living in house. My question is:

1. How do I put in the $500,000 capitol gain exemption for the sale of our house.

2. How do I then put in the large passive carryover

3. How do I put in the depreciation and what numbers do I use for each and in which section is each entered.

Please use the following numbers for simplicity (not real numbers.)

Home sale: $1,000,000

Passive carryover: $200,000

Cost basis: $400,000

Depreciation: $150,000

Exemption: $500,000 (two of us)

Thanks!

[AmeliesUncle]

Was it a rental in 2024?

If so, the last time I checked it is all handled in the rental section, when you say it sold and then you go through the "asset" for depreciation and mark it is sold again (in most cases, say "no" to the Special Handling screen).

[TillerF15]

It was not rented in 2024, but was sold in April 2024. So, how do I take the $500K for primary residence?

[DianeW777]

The $500,000 for the sale of your personal residence will be allowed if you meet the qualifications for exclusion. However, you won't see the full amount of gain as tax free because you must recapture the depreciation used when it was rental property. If the rental property was removed from your tax return in prior years, Form 8582 for unused passive losses may not have carried over.  You will need a copy of the most recent one to report your sale and passive losses carryforward.

1. How do I put in the $500,000 capitol gain exemption for the sale of our house. You will have an exclusion however  there will be taxable gain as noted above.

2. How do I then put in the large passive carryover - It depends on whether you filed Form 8582 each year and if this is current on your 2023 tax return. See the information below to enter the suspended losses.

3. How do I put in the depreciation and what numbers do I use for each and in which section is each entered. See the how to enter your home sale below and use the depreciation expense used from your most recent rental period.

The answers below assume rental itself was not part of your 2023 or 2024 tax return (unless it was used for the carryover passive loss only).  Enter the rental activity, if only to include the passive loss carryover which can be used to offset the gain attributable to the rental home portion only.  

• When you converted rental property into a personal home.  The rental home had suspended passive-activity losses. You can continue to deduct the suspended passive activity losses from other passive income. If you have no other passive income, the suspended losses remain suspended. Carry them forward until you sell the home in a fully taxable transaction.
  • IRS Publication 925 (most recent version)

To enter Passive Activity Loss Carryovers from a Prior Year for your Rental Property in TurboTax Online/Mobile or TurboTax Desktop:

1. Search (upper right) > type rentals > Click the Jump to.. link
2. Click Start (or Revisit) next to Rental Properties and Royalties (Sch E)
3. Click Yes
4. Click Continue
5. Click the blue Edit button next to the rental you'd like to add info for
6. Click Continue until you reach the screen entitled Do any of these situations apply to this property?
7. Scroll to the bottom of this page and check the box next to I have passive activity real estate losses carried over from a prior year. 
8. Click Continue
9. You'll be able to input the carryover amounts on the next screen
10. In Property Info be sure to indicate it was sold and when prompted select Special Handling (this stops TurboTax from looking for sale information in the rental.

When you enter the home sale in TurboTax it will ask for a couple of items that are needed to report the sale correctly.  

1. The total depreciation expense that was allowed during the period it was available for rent.  Check your prior tax returns for this figure.
2. The number of days the property was available for rent during the ownership period.

Results:

1. The amount of depreciation that was allowed will be completely taxable up to the amount of gain received on the sale.
2. The remaining gain if any, will be split between taxable and and amount eligible for exclusion by using the following formula.
   • The total days available for rent will be divided by the total days owned to determine the portion of the remaining amount of gain that is taxable for the rental period
   • The balance will be eligible for the home sale exclusion
3. TurboTax will do all the calculations based on your entry

@TillerF15