Future 2025 Sale of 100% Rental Property

[Benjamine]

My tenant has vacated the property as of Jan 8, 2025 (no rent charged for January 2025).  The property will be listed for sale next week and no longer available for rental.  Purchased in 2013 and depreciated per TT Schedule E.  As of Tax Year 2023, the only depreciation currently taken is the residence and 15% business use of vehicle (placed in service 10/22).  All other assets have zero depreciation after 5 year life such as appliances and flooring. 

Based on what I've read - when I do report the sale in 2025, I need to assign a dollar amount of the sales price to each remaining asset.  There are none that I am able to take out of service at this time. 

I am assuming that I do nothing differently than every prior year when completing the taxes.  

1.  Do I need to take the vehicle out of service/convert to personal use as of 12/31/24?  I will still be using it to maintain the property, etc., until it is sold.  Is the vehicle even deductible at the point where the property is not for rent?

2.  Are there any suggestions to make this as uncomplicated as possible for Tax Year 2025?

Many thanks for any insight!  

[RobertB4444]

You made it as uncomplicated as you could already!  By not renting the property at all in 2025 you won't have to do a partial year's rental income and expenses.  Depending on when it actually sells you may have to take some depreciation for the year but otherwise it should be pretty smooth sailing.

TurboTax will roll the rental property over from 2024 into 2025.  When you go into your 2025 taxes you will tell the system that you sold the property and for how much.  It will assign a value to all of the assets and set up the sale on your return.  

As far as the car goes - you will need to report the sale of the car if and when you do sell it.  For this year convert it to personal use.

@Benjamine 

[Benjamine]

Many thanks for the info! One follow up question.  As far as making estimated tax payments for 2025 (was required to do so for 2024 for the first time), I know for certain we'll be paying a hefty tax price since the value of the property has at least doubled since purchased in 2010.  I was thinking, after I complete my return and file it, would it be wise to "pretend" I sold the property for the asking price and guestimate closing costs, adjustments to basis, etc., to see what TT reflects as the amount taxable.  My thinking is that would then give me an idea of what I should pay in estimated tax payments. 

Does that make sense?  It's my first time selling rental property so pretty ignorant.  I know there's depreciation recapture as well as capital gains.  Or, since 2024 was the first time we had to make estimated payments, do I need to be concerned about guestimating the possible tax liability? 

Sure do appreciate any advice! 

[KrisD15 · Accepted solution]

Reporting the sale as if it happened in 2024 might not give you an accurate tax total since the treatment of the capital gain will depend on your other income, and the depreciation recapture will be taxed as Ordinary Income.

If everything will be the same, you might try using that as a guess, but there won't be rental income/loss so that might make a difference.

It's also unclear why you were required to pay estimated tax payments for 2024.

Are you concerned about making estimated payments because of an Underpayment Penalty or are you concerned because you don't want to have to make a large tax payment for 2025?

If you simply don't want a penalty, according to the IRS:

"You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%."

I would use the information above to decide if you need to make estimated tax payments. 

If you pay 100% (or 110% if applicable) of your 2024 Tax Liability in 2025, there will not be an underpayment penalty. 

The amount of tax that you must pay in 2025 should be made evenly over the year, or as you earn the income (sell the property). Some of the tax might be paid as withholding if you are a W-2 employee.

Let's say your tax liability (Form 1040 Line 24; not simply your payment due) was 20,000. If you pay at least 22,000 in 2025, there will be no penalty. 

If you are trying to avoid a large tax payment due with your 2025 return, you'll need to try to figure what the sale will do to your 2025 tax liability by applying your tax rate to the depreciation recapture and then adding the tax for the capital gain to the tax on your other income. 

Here is a link from TurboTax with more information. 

[Benjamine]

Thank you so much for such a detailed explanation.  My concern was avoiding a Underpayment Penalty.  Our interest income had skyrocketed, thus the requirement of estimated payments.  I'd rather pay it now than get hit with Underpayment.  Your information answers my question perfectly!

Many many thanks! 

[Benjamine]

I followed the steps on the interview and indicated I'd stopped using the vehicle on 12/19/24.  On the "Do any of these apply screen: I checked started using as personal vehicle 100% and % of business use varied.  I answered yes to converted to non-business use. 

I then went to Sale of Business Property and selected Any Other Property Sales (as the interview suggested).  The box for Recapture or Listed Property was checked.  The next screen asked if Sect 179 / Listed Property business was less than 50% for the first time.  I selected NO.   (only used vehicle since 2022 and business use was never more than 20%, no Sect. 179 deduction taken - just standard mileage deduction.  

My question is there are no further questions to answer in the Interview.  When I review my forms, the Car and Truck Worksheet form Part VII Disposition of Vehicle  shows: "date sold, given away or abandoned as 12/19/24.  The reminder of the worksheet is blank.  Have I completed this conversion to non-business use correctly? 

Again, many thanks!

[DianeW777 · Accepted solution]

The answers you completed in the vehicle section were correct.  

• Because you still own the vehicle, it was simply converted to personal use and the 20% of business use prohibited any type of recapture provision (Section 179), there is nothing to report under Sale of Business Property.

Based on the worksheet, you have completed it correctly however you should remove any data under Sale of Business Property since there was no sale.

Until you sell or otherwise dispose of this vehicle (trade), there is nothing to report.  At any point when it is disposed of there will be a taxable event on the business portion of the vehicle.  Keep all business miles, total miles at that time, and original cost.  The Standard Mileage Rate (SMR) has a portion considered as depreciation, which will be used to offset the cost at the point of sale or other disposition.

As indicated previously, the rental property sale will take place in 2025.

@Benjamine 

[Benjamine]

Update, rental property sold and closed in 30 days!  Just to make sure I understood correctly, my 2024 tax liability (Line 24 of 1040SR) is $6,500 so if I make estimated payments totaling $10K - I will definitely not face an underpayment penalty?   My only concern is underpayment - paying a large sum on my 2025 return is expected. 

Again, many thanks for the great assistance! 

[PatriciaV]

If you are basing the estimate tax for 2025 on a test return in TurboTax 2024, the result should be fairly accurate. You have until April 15 to pay the first installment, so you may consider waiting to update the test return based on the actual closing documents for the sale. Unless you are prepared to loan money to the IRS, overpaying estimated taxes is not necessary. 

In general, you may owe an underpayment penalty for 2025 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:

• 90% of your 2025 tax, or
• 100% of your 2024 tax. Your 2024 tax return must cover a 12-month period.

[Benjamine]

I started the interview portion to report the sale of the rental (closed 3/7/25).  I checked the box indicating property sold in 2025.  The next screen asks if rented all year - selected no - then asks number of days rented at fair rental - entered 0, then entered 0 on personal use.  Checked the box that indicates  I did not rent or attempt to rent this property in 2025.  A paragraph then appears stating since it was not a rental at all in 2025, I should delete it as a rental.   

This is confusing to me - if I were to delete it as a rental - then where would I enter the sale?  The tenant actually was there for 8 days in January - would it be wiser to say it was rented for those 8 days? 

Appreciate any assistance - fyi I purchased the desktop Premire edition this year but seems exactly the same as Deluxe so far.  

[PatriciaV · Accepted solution]

Yes, you should indicate that you rented the property for the eight days before the sale. This is necessary to preserve the historical information from your prior tax returns. You're not required to report rental income (if the tenant didn't pay for those days) in order to proceed and report the sale.

TurboTax Desktop Premier has expanded interviews and specific On Demand Guidance in the program that you may find helpful in your situation. Otherwise, the desktop software versions all contain the same forms.

[Benjamine]

Many thanks for the quick reply!   I have this nagging feeling I'll be back with more questions - first time dealing with the sale of rental property!  

[Benjamine]

While still waiting and waiting for the depreciation/amortization section to be updated, I've been reviewing all the posts on disposition of the assets remaining on my Form 4562.  In addition to the building/land, I also have some assets that are full depreciated including a 2010 stove, 2012 refrigerator, 2013 dishwasher, 2013 HVAC system, and a few flooring replacements (newest asset was 2017)  etc.  All were included in the sales price of the home.    

If I am understanding the many posts correctly, since I sold the rental property at a gain, I need to assign a "sold" price to each of the assets.  Clearly, there is no way to determine a fair market value of any of these assets, so may I assign each the value of $1.00 correct?  If so, I then take that combined total amount and deduct it from the total sales price of the building? 

Thanks.  

[DianeW777 · Accepted solution]

First I will place an example of how you prorate the selling price to each of the assets including the land.  For any asset, such as appliances, that really have no value because they are past the recovery period of five years you can use a zero.

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset. If you want you can check the allocation of building and land in your county real estate tax office, on file now.

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

Passive Activity Loss Entry if applicable:

Assuming your passive losses were carried over each year, this will be a separate and identifiable entry which will carry to the Schedule E.  The full remainder of passive loss carryover is used in the year of sale as an expense. This is combined with your overall rental gain or loss to your Form 1040. 

• When you are on the screen 'Do any of these situations apply to this property?' (Property Profile section), be sure to check the box under Carryovers. 

See my notes below on entering the sales price/expenses for each asset inside the rental activity.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Search (upper right) > type schedule e > Enter > click Jump to .... link
2. Answer the questions and on under Rent and Royalty Summary, click Edit
3. Click Update to the right of Assets/Depreciation.
4. Do you want to go directly to your asset summary?, click Yes and Continue
5. Click Edit to the right of each asset to be disposed of
6. Go through several screens until you get to Tell Us More About This Rental Asset
7. Click on This item was sold…….   And continue to answer the questions

You might also review information here for more details.

@Benjamine 

[Benjamine]

Dianne - thanks for the quick and thorough reply!  Before I calculate my adjusted basis I have two questions

Based on Parcel Summary in 2010 (purchase date) the total Market Value was $255,710 - Bldg = 210,910 and Land $44,800.  Form 4562 reflects these numbers to date.   Tax Assessor as of today reflects total Market Value is $176,910  -   Bldg = 158,910 and 18,000 Land.   Is this an issue?  Which numbers do I use to calculate the percentage? 

Secondly, our buyers reimbursed us at closing $94.52 for the HOA fees paid by us for 7/24 - 7/25.  I did expense that on my 2024 return.  Do I add that amount under "rental income" at the beginning of the interview (as I was advised to do on the reimbursement of the homeowner's insurance) or will that figure belong elsewhere in the interview questions? 

Thanks!