The rental property should indicate that it was removed from service but not sold.
Huh? I'm sorry, but that's just wrong on so many fronts, unless certain specific criteria are met. The issue is, "specific criteria" has not been provided. Therefore, it most likely does not apply.
Do understand however, that even though you may qualify for the full $250 or $500K exemption, you *WILL* pay taxes on the depreciation you are required to recapture. That depreciation is *not* excluded from being taxed, *no* *matter* *what*.
Then in the home sale you will enter
I'll stop reading right there. Rental property is not reported in the "Home sale" section, regardless of who the last tenant was to move out of it; be it the tenant or the owner.
So, I"m going to assume the last tenant to move out prior to the sale was a renter. The below guidance will apply. But before you start, you need to delete anything you did for this in the home sale section. Otherwise, your errors will never go away. Using the below guidance, the program will do a vast majority of the math "for you" in the background, without "bothering you" with the details. It'll just show you a summary of the end results when you're done with the SCH E section.
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 2020". Select it. After you select the "I sold or otherwise disposed of this property in 2020" 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 2020" 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.
