How do I combine Rental Depreciation recapture with Home Office depreciation recapture?

[jerrymc]

My wife and I owned our primary residence from 2001 to 2021 and I've used TurboTax that entire time.  We have taken the Home Office deduction and depreciation for two different businesses during that time, ending in 2018.  We moved out and rented out the entire home in 2018, then sold the home in 2021.  We meet the 2 out of 5 year residency test for the $500,000 cap gains exclusion.

TurboTax Home & Business 2021 recognizes and correctly enters the depreciation recapture amounts from the 3 years of rental activity.  However, it is not entering or giving me a chance to enter the needed recapture for the Home Office depreciation.  I know the amounts I need to recapture.

Question: How do I add the Home Office depreciation recapture amounts to the Rental depreciation recapture in TurboTax?

[AmyC]

You subtract it from the basis of the house. In the rental section, it asks you to enter the basis of the house.

[jerrymc]

That isn't real clear to me.  First, I only see one place to change the cost basis and that is in the "Sale of Property/Depreciation" section.  Changing that number makes it inconsistent with the two prior years returns and would seem to invite an audit since it obfuscates the source of the depreciation.  It may be mathematically correct, but it's not very good documentation.

Second, I've read that this (depreciation recapture) should be a Schedule D entry in the "Unrecaptured Section 1250 Gain Worksheet".  However, TurboTax does not give me an opportunity to add other depreciation amounts to this worksheet.  It appears that line 12 on this worksheet is the correct place for this Home Office depreciation recapture entry.  Can I just make a manual entry on this line in Forms mode?  Or will this just hopelessly confuse TurboTax.

[PatriciaV]

You are correct that the Home Office depreciation recapture is reported on Schedule D as you described.

When you stopped using the residence as your Home Office, how did you report this on your tax return? Were there any tax consequences of removing this home office?

If you know the amount to recapture, you may be able to add this to your Home Sale Worksheet Part IV - Exclusion and Taxable Gain. Lines 29B and 30 are "enterable," which means a manual entry should not trigger a form error. The On-Demand Guidance for both lines (right click the box & choose Data Source) refers specifically to a Home Office. The amount on Line 39 is carried over to the Unrecaptured Section 1250 Gain Worksheet, which should produce your desired result. 

[jerrymc]

@PatriciaV  There were no tax consequences of removing the home office until sale of the home in 2021.

So I adjust the total value currently in line 30 of the Home Sale Worksheet to be the sum of the Rental depreciation and the Home Office depreciation?  This appears to work, but I must use the Override feature to make that permanent, correct?  I'd like to add supporting details, but that field does not allow it.  Where can I add details?

Are there any other places that would need to be overridden in this case?

[jerrymc]

@PatriciaV   Hmmm.  This change did not carryover to my state return (California).  How do I make that happen?  Or do I need to make a similar manual change to the State return?

[PatriciaV]

Yes, if you manually entered the information for your Federal return, you will probably need to do the same for the State return.

[jerrymc]

It turns out that Home Sale Worksheet Part IV - Exclusion and Taxable Gain. Lines 29B and 30 are NOT the correct places to add the Home Office depreciation to the Rental depreciation.  Doing so will cause the Home Office depreciation recapture that you add to be taxed at your long term capital gains rate (in my case 15%), which is not correct.  It should be taxed at your marginal tax rate to a max of 25%.

The solution I found is to modify the value on Form 4797 Sale of Business Property, Ln 22 to be the sum of the Rental depreciation and the Home Office depreciation.  It must be overridden for this to work.  Now the entire recapture (gain) is taxed properly.

For the State of California, the value must be similarly modified on Sch D-1 p2 Sale of Business Property, Ln 25.  Override this value for it to work.

This solution still does not enter correct numbers for purposes of calculating AMT.  In my case it made no difference, but your mileage may vary.

I don't yet know if TurboTax will allow me to e-File with overridden values in these forms.  All of this took me hours of research to figure out.  TurboTax needs to find a real solution to this fiasco.  This is not the quality that I expect from a product labeled "Home and Business".

[Carl]

Basically, if you over ride you will not be able to e-file. It also causes other issues math-wise, as you have discovered already.

What you need to do after having gathered all your numbers including depreciation (which I get the impression you have done so already) is to report this sale in the Sale of Home (Gain or Loss) section. It's under the Personal tab in Personal Income >> Less Common Income >> Sale of Home (Gain or Loss).

[jerrymc]

@CarlThat doesn't work.  When I tried to enter the sale in that section, TurboTax warns me that I have already entered this sale in the Sale of Business Property section and do I want to enter another property sale.  Clearly I don't.  The property was a rental only for the last 2.5 years of my ownership.  The Home Office depreciation was taken in the years prior to the rental.

[Carl]

THat's because you need to delete it from the sale of business property section.

[jerrymc]

@Carl  Nope, that doesn't work either.  After deleting Form 4797, I returned to the Personal Sale of Property page in the step-by-step.  There is no option to add the information I need to add.  Going to the Form Home Sale Worksheet, I'm faced with the exact same situation having to enter a number with an override.

Any other ideas?  Why didn't TurboTax carry forward the Home Office depreciation amounts from the prior years after I closed the business?  That's the real problem!

[Carl]

Deleting a single form is never going to work. You have to work back through the "Sale of Business Property" section and delete the transaction entirely.

[jerrymc · Accepted solution]

@Carl   There was no way I could find to backtrack those entries.  I ended up starting my entire return over.  This time I entered the Sale of Property in the Personal section before I entered any business info.  I was able to add the recaptured depreciation for the Home office and Rental combined (with supporting details) in this section.  Thank you!

Then when I did enter business info and indicated the property was sold, when TurboTax asked if I wanted to report this sale on the Home Sale form, I said no.  When it asked if I wanted to report a new property sale, I said no.  That seems to work.