Home Sale Scenario and Turbo Tax tracking

[bluemoon]

I have used turbo tax for over 2 decades. In 2013 I purchased a new 4bd/3ba home. While living in the home, I rented a room from 2013-2015 and declared any rental income received and offset it with any deductions available, such as providing wifi, utilities. I am now contemplating selling the home and did a "what if scenario" using the latest 2018 software.

To my much dismay, as I entered the transaction of a possible sale, I am finding out even though I have used Turbo Tax for all those years, and each year tax file has been created from the previous year, for some reason none of the information from the past is pre-populating, such as, the original purchase price, the amount of rent collected for the room and any deductions. I am beyond fumed.

Am I doing something wrong? How do I not go back to all these years and manually enter the data that I believed all along Turbo Tax should have kept a history of?

As a side note, let's say if there is a miracle cure, and I wanted to get a second opinion from a tax professional, for peace of mind, can Turbo Tax offer such a service for tax preparation - given it is not tax time yet.

[Carl]

Basically, you have to report the sale of the "personal use" property separately from the "business use" property in order for TurboTax do do it right. But chances are you'd enter at least one incorrect figure somewhere and screw it all up. Generally when you report the sale of rental property it's reported in the same section you report the rental income/expenses in. That is, the "Rental & Royalty Income & Expenses (SCH E)" section of the program. But you can't do that since the entire property was not classified as residential rental real estate.

Therefore, you need to report the sale in the "sale of home (gain or loss) section. Before you can do that, you will first need to print out the 4562's from your 2015 return (assuming that's the last year you rented a portion of the property out) because you will need figures from the 4562 titled "Amortization & Depreciation Report" in order to recapture the depreciation you took on the property.

Now while you may qualify for the "lived in 2 of last 5" rule that allows you to exempt up to $250K (500K if filing joint) of any gain from taxes, there are two things I can tell you.

1) In the year of sale all depreciation taken is prior years is recaptured and taxed. That recaptured deprecation is *NOT* exempt from taxation under that "lived in 2 of last 5" rule either.

2) I'm not sure, but I "think" your maximum allowed exclusion will be affected by the "business use percentage" in the years you rented it out. If it is, it won't be that much since the last year you had any business use of the property was 2015.

"I wanted to get a second opinion from a tax professional"

Only a true fool would not "at least" consider getting personalized one-on-one face-to-face professional help. In fact, since your state taxes personal income I would highly recommend you at least consider paying a professional to do your taxes for the tax year you sell the property, if you have even the "slightest" apprehension of your confidence to report the sale correctly. The IRS loves mistakes, as that's one way they get more money by assessing interest, fines and penalties even on the honest mistakes.

"Am I doing something wrong? "

Yes and no. Back in 2016, which was the first year you did "NOT" rent out any portion of the property, you deleted the SCH E from your 2016 return. That also deletes all the history. So it's gone.

What I always tell people to do is to print their accepted, processed and completed tax return every single year, and to print everything. Not just the "forms required for filing" and not just the "forms to keep for your records". But to print absolutely everything to include all calculation worksheets and forms. Yes, it can easily be over a hundred pages. But it's times like this that you're glad you did it.

So now, you need to go back and print the two 4562 forms from your 2015 tax return since that was the last tax year you rented out all or a part of your property. Both print in landscape format and one is titled "Amortization & Depreciation Report" and the other is titled "Alternative Minimum Tax Depreciation". YOu'll need the first one to report your sale of this property.

[bluemoon]

Hi Carl,

Thank you kindly for a very descriptive and thoughtful response. I wish you were on the software developer team with Intuit, so that the software would have built-in intelligence to figure out that since it was partially rented and no longer rented and perhaps as one of the possibilities could be sold in the future, it should still be able to suppress the information if not renting but have it available in case the scenario of sale came about in the future. Also, reasons beyond me to fathom, why TT would ask a user to put all mortgage interest and taxes under rental and then when entering personal income asks you to ignore entering mortgage interest and taxes with a message on the screen that "we have already entered this information under rental portion" is plain bad design. In reality, it should have apportioned the taxes and interest between rental and non-rental usage, but it doesn't. Not sure if the IRS would come back and say well you need to apportion all previous filings and file amended returns. 

Thank you once again. Your assistance is immensely appreciated.

[Carl]

I wish you were on the software developer team

Would never work. Basically, program writers are not users, and users do not write programs.  There has always been and will most likely always be that "broken link" between programmers and users. Back in my military days I wrote quite a lot of software. But I never was the one that used it on a daily recurring basis. Many "feature requests" received from the actual end user were just flat out not physically possible because of programming limitations imposed by the programming language used as well as the hardware that program was used on. Add to that the further limitations when dealing with cross-platform programs. What can be programmed for a MAC may not be possible on a Windows machine, and vice-versa. So in an effort to keep functionality consistent across multiple platforms, sacrifices have to be made. I'm sure you're aware that MAC and Windows are not the only platforms out there - though they are the only platforms supported by Intuit TurboTax for their particular software.

it should still be able to suppress the information if not renting but have it available in case the scenario of sale came about in the future.

In a "really" weird sense, it does. So long as you don't delete the SCH E in the first year it's not a rental, that data will always be there in the program. However, I don't know if not deleting it means you'd be filing a zero income/expenses SCH E or if it would cause issues that would prevent e-filing. Therefore that's why I tell people this:

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 In the tax year you convert the rental to personal use, make sure you print out *EVERYTHING* even if you end up printing over 100 pages or so. You want all calculation forms and worksheets on physical paper that you can file away with that year's tax return. It's a 100% guarantee you will need that information in the future when one of three things happens in your life.

1) You die. Whoever manages your final affairs will need the depreciation information to properly file your estate return and dispose of the property either through sale or by passing the property to a beneficiary recipient.

2) You later convert the property back to rental or *any* *other* type of business use. Depreciation taken in prior years *MUST* be accounted for.

3) You sell or otherwise dispose of the property yourself. All prior depreciation has to be recaptured and taxed, or otherwise accounted for upon transfer of ownership by any means, if the transfer occurs while you are still alive.

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is plain bad design.

No. It's bad wording. The functional design is excellent. The wording explaining why you don't need to enter it again in the "Your Home" section has much to be desired.  Basically, if the property was rented for less than the entire year as determined by your in service date (or conversion date if you converted it back to personal use) then the program does the splits between SCH E and SCH A for you, in the background. The screens in the "Your Home" section will show you what was allocated to the SCH A, but it's in what I refer to as "the small print". Personally, I think it should be in big red, white and blue flashing letters 50 feet tall that flash so bright you need a welder's mask to keep from getting blinded by it. That's the only way I can see to significantly reduce the number of users that don't pay attention to that small print, and enter the information a 2nd time and then blame TurboTax when they get audited on it for "THE USERS" mistake. That's why I also stress to folks to "read" "the" "small" "print", because while the print may be small, it really matters BIG time.

it should have apportioned the taxes and interest between rental and non-rental usage,

Again, the program does exactly that, unless you select the option to "do it myself" of course. But one reason it's not done when it should be is because folks just don't read the small print. On top of that, for some situations the small print needed is just flat out not there because the programmer's did not include it for reasons I can't explain.

For example, when you convert the property from rental to personal use on say, Jun 30 for example, there's a later screen that will ask for "percentage of business use". Most folks make the mistake of entering 50% business use since it was only a rental for 50% of the year. That's wrong. What you need to enter in that box is the percentage of business use *while the property was classified as a rental*. While not impossible, it would be highly unlikely it would be any less than 100% business use while the property was classified as a rental.

Another mistake (and this is the bigger one) folks make is when being asked for personal use days. 

A person converts their property from personal use to rental on July 1st. Then they're asked for number of days rented which they enter 182. (July 1st - Dec 31st is 182 days). Then they're asked for days of personal use and they enter 183. Then they wonder why there's no depreciation being shown on the property. Well, it's because the user told the program that it was "personal use" for the entire time it was classified as a rental. That's wrong. Personal use days is zero. If one reads the small print on that screen it does inform the user to enter the number of personal use days *AFTER* converting the property to a rental.

Whew! That was a lot to cover! Buy hey! I love this stuff! Anyway, look in the assets/deprecation section and elect to edit the property itself and work it through. On the last screen click the details button and if it shows you zero depreciation, then more than likely you messed up. If so, don't feel bad, as you're not the first and I can guarantee you that there's no way on earth you'll be the last. 🙂