Depreciation recapture

[KathyHe]

I sold a house this year 2025.  I rented it for 3 years starting 2015.  I used the amount from schedule e form 1040 line 18 for those years, is that correct?  Also Turbo Tax asks for the amount and then asks for it again after May 7, 1987.  Do you have to put that amount in both places?

Thanks

[pk]

@KathyHe , I am not sure  that I understand them situation --- because of your reference to schedule-E.  Here is what I  think the situation is :

(a) you acquired a residence ( single -family ?) sometime prior to  2015

(b) you rented out the property for  a  period  ( 3 years  ) from 2015 through 2018

(c) you used the property  for personal use from 2019 through 2025 ( main residence ? )

(d) in 2025 you sold the  property 

 Assuming that  the above is substantially correct, 

1. you report the sale of the asset on form  8949  telling TurboTax that you have a 1099-S

2. While filling out the details of the sale ( and  using   HUD-1 / settlement statement and your 2015  federal return back-up sheets, especially the depreciation details) you provide the   adjusted basis ----( acquisition basis PLUS cost of improvements during personal period(s) LESS accumulated depreciation during business use period) ,  Sales Proceeds ( sales Price LESS sales expenses such as  sales prep expenses, commission, transfer tax , title work etc.) .  TurboTax will then compute the gain

3.  Of the total gain, the portion due/equal to accumulated depreciation is  given ordinary  income/gain tax treatment.  The rest of the gain is either capital gain and/or eligible for  "main residence sale" exclusion up to maximum allowed.

Given the above, can you please tell me where you are in the  TurboTax  sales  entry process ?

[KathyHe]

I referred to 1040 schedule e line 18, that where the depreciation amount was for the years rented.   Was not sure about that part . I assume the total goes in the part that asks about depreciation info on turbo tax for the sale,  it also asks later on in the same section about depreciation after may 6, 1977.  

If I can deduct from just the improvements would sure be better.  It’s making me owe a substantial amount more 

[pk]

@KathyHe , just to be sure of what you are seeing ( I used  desktop/windows Home&Business 2025 ), and recreated the scenario as I understood from your post.  And ,  yes you have to enter  that accumulated depreciation  because of law changes  May 6th 1997.  

I did find that a lot of the questions etc. were somewhat ambiguous/ unclear/confusing.  But if you keep focus on what it is trying to fill out  ( see my earlier explanation -- hopefully not too confusing ), you will be alright.  If you have the windows / desktop version you can also go to the forms mode to see what it is filling out.

While this requires a little bit of patience, the result is satisfactory.

Yes , it does ask for sales expenses  as also costs of improvements  during personal/ residence use.

Is there more I can do for you ?

pk

[KathyHe]

Thanks for your help.  I think that I can reset the value if my husband passed in the time we were living there?  And the depreciation claimed is no longer valid?  To many factors here sorry

[KathyHe]

I’m still looking for the answer on death of spouse with depreciation claimed in first few years with owning for 10 years.  Also would lie to know exactly where to find the depreciation amounts on previous tax returns.  Thank you.  Need to make sure I get this right.  

[pk]

@KathyHe , please accept my apologies for not recognizing that you were  waiting for an answer.  I will be happy to prepare an example to show --- but first can you tell me :

(a) when did your husband pass ?  Need is did he pass in the year of the sale ?

(b) do you have access to your returns  for the rental years ? or at least the last rental year  ?  You said  earlier  you rented out the prop for three years starting 2015 --- so ideal situation is to have access to schedule-E of the 2015, 2016, 2017 and 2018.

(c) did you use the property as your main home for all the other years -- i.e. 2018/19, 2020, 2021. 2022. 2023, 2024 and 2025 ( till the sale closed )?

Please accept my condolences for your terrible loss.

I will circle back once I hear from you --yes ?

[KathyHe]

Hi. Thank you again  so my husband passed on 7/13/23.  I listed the house in 4/2025 sold in 12/25.  I do have my tax records for rental period.   Not sure which line is correct to use for the 3 years it was rented.  We used the property as main residence from 2019 until 2024.  Then I purchased a condo in CO and was going back and forth and used the condo for the primary that year.  Now that’s on market and I bought a new home   

so I think I can use his dod to reset the fmv.  Not sure if depreciation claimed in 2016 to 2019 still needs to be claimed?  And whether any improvements before his death are added to my value when house was sold .  

a lot of varying factors and I appreciate all your help.

[KathyHe]

Did I lose you pk?

[pk]

@KathyHe , it took me a little time to create your scenario -- what I have done  ( and it works correctly ) using  Windows Home & Business:

(a) what needed to be achieved ---  1. step-up value based on FMV on the date of passing of spouse; 2. recognize  accumulated depreciation claimed/allowable for the period of rental use of the property  for basis adjustment and for recapture ( ordinary gain treatment); 3.Home sale exclusion for both spouses ( section 121 -- spouse passed within the last two years and met all the all the eligibility before passing ).

(b)   

 1. In the personal information area, set up a new return naming the living spouse as primary, decedent as secondar filer, provided date of passing etc. ;

2. Entered   incomes ( under personal income tab and choosing "I will choose what I work on " and then visiting the  appropriate income categories);

3. Under sale of home entered  details  ---  acquisition cost, cost of improvements over the years,  sales price, sales  cost   (-- used a  detail back-up sheet to detail, sales prep. costs, commission, title company / closing costs, transfer tax etc. )

4. for depreciation --- added all the depreciation amounts allowed  ( from  Schedule-E line # 18 of each year ) and entered these as a back up detailed sheet.

When all done, then moved to forms mode  -- 

In Forms mode  --- from the left side ( list of forms and worksheets being used :(

          (A)  Home Adj. Basis --- check/ confirm ( including the details sheets ) for lines  4 ( Cost of Improvements ),  line 7 ( other increase to basis) -- add / confirm statement " Step-up -- passing of spouse" --- use a detail back-up sheet to show how you arrived at the figure,  line 10  ( Depreciation .... ) -- again use a detail back-up sheet to show how you came up with the total figure,  line A1 ( AMT ) --- this should be the same as line 10 -- but check from old Schedule-Es

           (B)  Home Sale Wks. ---- this is where all the details of the home sale is shown -- check and make sure all is good.  Line 16 should be checked if the  statement is correct --- decedent spouse's DoD is no more  than two years from the closing of the sale date and was otherwise eligible for the  gain exclusion.  Checking of this box triggers the US$250,000 eligibility for both spouses/owners/users.

If all looks good then go back to step-by-step and allow TurboTax to do all the checks etc.

Hope this  helps in your preparing a correct return.

Is there more I can do for you ?

[KathyHe]

Thank you again for all your help.  It was a lot but I think I can get through it now without spending hundreds on a CPA.

[pk]

@KathyHe , if you need more help/support, you are very welcome to either post here OR use PM  ( just no PII -- Personally Identifiable Information).

pk