Form 4797 Not getting all the original basis in calculation

[TurbQ]

Hello.

I sold residential rental property in 2021. There seems to be a discrepancy between the amount of cost or other basisis plus expense of sale (Line 21) and the the Asset Entry Worksheet. Here are the high-level facts:

I purchased the home (in 2008) and entered an "asset" into TurboTax for depreciation purposes. About 30 days after closing (also in 2008), I had the foundation repaired and entered a second "asset" into TurboTax for depreciation purposes.

Now at sale, the original purchase "asset basis" is being reflected in Line 21, but the foundation "asset basis" is not in Line 21. I have entered the same "sale date" on the foundation asset worksheet, but it doesn't seem to trigger the basis being added to Line 21 (and accumulated depreciation deducted on line 22).

If I put in a sale price of $0 on asset worksheet (and the full sale price on the house asset), it shows up in Line 21, but comes as a "loss"... which I don't think is the appropriate way to handle the sale.

I'm stuck on how to accurately get the Foundation "basis" included in Line 21.

Please let me know how to handle.... do a manual entry somewhere in TT or is there an appropriate way to use Asset Entry Worksheet so it truly works and flows to all appropriate forms (my strong preference 🙂

Thank you!

[Mike9241]

for each asset, you must indicate it was sold and allocate a portion of the sales price and sale expenses.  otherwise, Turbotax will not include the cost and depreciation in the sales calculation. 

since the home and foundation were acquired close together I would allocate sales price proportional to the cost of each.

[Carl]

If I put in a sale price of $0 on asset worksheet (and the full sale price on the house asset), it shows up in Line 21, but comes as a "loss"... which I don't think is the appropriate way to handle the sale.

You're right, in that it's not the correct way to handle/report it. If you show a loss on some assets and a gain on others, then the amount of depreciation that "should" be recaptured is instead, included in the capital gains and taxed at the capital gains tax rate, instead of the ordinary income rate.

Here's the general guidance on reporting the sale of rental property in TurboTax.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[TurbQ]

Thank you so much for the guidance. I made progress, but not exact yet.

I went into the Asset Worksheets for the house and the foundation. I split an amount of the sale and the expenses across both asset worksheets (substantially weighted towards the house). Then, I checked Form 4797. What TurboTax did was to add another "sale" of the foundation... So I have the house in Column/Property A and the Foundation in Column/Property B...

I'm not sure if it matters, but is there a way to just combine the totals into Column/Property A since they are really both the same property? Or... is this the correct way to handle within TT?

Thank you

[Carl]

So I have the house in Column/Property A and the Foundation in Column/Property B...

That is correct.

is there a way to just combine the totals into Column/Property A

No, unless you want recaptured depreciation to be taxed at the capital gains tax rate, instead of the ordinary income tax rate. Even then, that would not be correct. The program is handling it correctly.  What matters for taxes is NOT how many columns are used on the form. What matters is the math performed for lines 30-32.

[Mike9241]

not in Turbotax.  professional software does allow mass disposition so everything shows up in one column but I doubt it would be worth the cost.

[CECPAD]

@Carl 

I have a similar problem with the disposition of improvements.  My depreciation schedule contains several asset worksheets.  Example, Carpet, AC, Washer Dryer, etc.  I followed all of the "step by step" process for each asset, but only the first two came over into Form 4797, Part III, Column B and C.  It didn't populate column D.  It did provide me an Enterable 4797, but it's blank.

How do I get the rest of the assets to populate 4797?

[Carl]

@CECPAD 

Did you take SEC179 or the Special Depreciation Allowance on any of those assets?

I assume you sold the property at a gain. If that assumption is wrong, then please state so.

Did you show a gain on every asset? To do so, your sales price for each asset must be at least $1 more than the original cost basis of that asset as shown on the 4562 under the "Cost (Net of Land)" column. (Your sale price for the land must be more than the cost shown under the "Land" column.)

There is a limitation of what the program can do, and it's not a bug. It's a limitation. If you show a gain on some assets and a loss on others, the program just flat out can not deal with it correctly on the mathematical front. You'll end up paying capital gains tax on recaptured depreciation that should be taxed at the ordinary income tax rate.

Finally, on the 4562 titled "Depreciation and Amortization Report" do you have any amortized assets listed under the Asset Description column? Typically, your financing or refinancing fees will be listed here under "Amortized Assets" if you entered those fees correctly when you acquired/refinanced the property. Amortized assets are not "sold" per-se. They're handled differently.

[CECPAD]

@Carl 

Thank you so much!!  Your expertise of this program saved my day.

1. I mistakenly entered all improvement assets with $0 for asset sales price. My mistake was thinking that the price of the house already included all of the capital gain.
2. Once I added an asset price on each asset worksheet, all the columns populated.  I made sure to reduce the price of the building asset accordingly.  Problem solved.
3. There were some additional errors I had to fix . .
   1. Manually add Special Depreciation where it was missing.
   2. Manually changed Asset Worksheet, Row 5 to F-Rental Furnishings. (the 27.5 Y SL improvements were categorized as I- Residential Rental.  This caused some assets to populate on Form 4797, Row 26 instead of Row 25.)
4. Once I finished those steps, Form 4797 was fully populated and the numbers all totaled correctly. Also, the Disposition Report for the house and all improvements was correct.
5. I didn't have any amortized assets on this house, but I'm glad you pointed that out, because I will have that come up on another house next year.

Thanks again!

[Carl]

The mistakes you made, everyone makes. The biggest reason they make those mistakes, is because TTX support tells them to!  Once everything is done correctly, then it all works out with SEC 1250, SEC 1230 and other assets showing up where they should on the 4797.

[phd2341]

I have a similar problem where the all the rental assets I have on schedule E does not generate some of the asset entry worksheet. Over 9 rental assets only 7 shows asset entry worksheet and of course a form 4797 for those properties are m

[klong1212]

So I have a similar problem as 4797 has not carried cost of land forward to 2023 when I sold. It shows as zero even though I did report land was worth 150,000 in 2021. I allocated SP of rental house between structure and land in same proportion as first reported in 2021. Can anyone explain what the program is doing?

[PatriciaV]

Check your Depreciation Report to see if it includes an amount in the land column for the asset. You may need to provide this information again when you report the sale. Although land is not depreciated, TurboTax will show the land value on the report for historical purposes.

If you are using TurboTax for desktop, click the Forms icon in the header. Find the depreciation report (Depr Report) in the left column and click the name to open it in the large window.

If you are using TurboTax Online and have not yet filed your return, you can download your entire return (including worksheets), as a PDF file to view or print. For this option, open your return, choose Tax Tools in the left column then select Print Center.

@klong1212