Then-wife and I purchased a home in 2007 for about 235K. Converted it to a rental in 2011. Renters moved out for some work on the home in 2016, which totalled about 6K. We divorced in 2016. Most of the house work was completed in 2016, but there was some not complete (and paid for) until 2017. There was some debate between us about whether to re-rent or to sell, but mostly the plan was to sell (at least on her end), and it was sold in 2017 for a loss -- sale price of about 215K I think (I have the exact number, but not with me at the moment).
I believe I can't claim my half of the expenses as rental unless it was re-held out for rent, or at least if our intent was to re-rent. If not, how do I handle the combination of converting its status (primary home to rental, and then I believe to business) and the divorce (in terms of adjustments to the basis, if indeed it ended as a business property and not a rental)? I do have access to my tax returns since it became a rental and can figure out what depreciation was taken on it since then.
You are correct that you can't deduct expenses if the property was not held out for rent. If it was rented in 2017, you would enter it in the Rental section and work through the interview. If it was not rented in 2017, enter it in Sale of Business Property. You will need to enter the depreciation taken to recapture it.
When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.
Now that you are selling, it gets a little trickier.
Calculating Gain/Loss on Subsequent Sale of Rental Property
If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.
If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property
You are correct that you can't deduct expenses if the property was not held out for rent. If it was rented in 2017, you would enter it in the Rental section and work through the interview. If it was not rented in 2017, enter it in Sale of Business Property. You will need to enter the depreciation taken to recapture it.
When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.
Now that you are selling, it gets a little trickier.
Calculating Gain/Loss on Subsequent Sale of Rental Property
If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.
If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property
Thank you Coleen. What about the fact that I divorced before it was sold? Is there some way I claim only half of the loss?
Yes, you can split the amounts with your former spouse.
How do I do that in Turbo Tax? Just use half of the sale price, half of the purchase price, etc.?
Unfortunately for her, I think she may have claimed the expenses as rental in nature. If I claim them correctly, is that going to increase the risk of one or both of us getting audited?
Also, does residential property depreciate if you are using it as your residence, not as a rental? From what I can tell from online and Publication 946, it doesn't look like it.
For the time period that it was a rental, you took depreciation. That has to be recaptured no matter what else happened with the house.
I think I have found where that was recorded on past Schedule E's, thanks. I don't know if you're able to answer my earlier question about audits. There's not much I can do either way except follow the rules.
No, I am looking at the Schedule E's for the years when we were married and the property was a rental. Checking how much depreciation was taken each year, which if I understand correctly must be used to increase the basis when calculating gain/loss on the sale. It was only sold last year, so I have not done anything with it tax-wise as far as the sale, improvements before the sale, losses on the sale, etc.
Oh, I get it. The depreciation must be recaptured whether or not you actually take it. Always better to take it.
There are other things that Pub. 551 says are allowed. Are these allowed even if they were paid in 2007 when the home was purchased as a primary residence?
Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including title search and preparation of the sales contract and deed).
Recording fees.
Surveys.
Transfer taxes.
Owner's title insurance.
Yes, settlement charges on the purchase and closing costs on the sale are added to the basis.
Are fees or costs paid by us as the sellers when we sold the property countable re: basis too?
Yes.
Sales expenses include:
- commissions
- appraisal fees
- broker's fees
- legal fees
- advertising fees
- home inspection reports
- title insurance
- transfer taxes or fees
- geological surveys
- loan charges (points) or other fees paid on the buyer's behalf
Sales expenses do not include:
- mortgage payoffs
- home equity loan payoffs
- rent-back costs
- payoff to creditors
- property taxes
- home owner association fees
Thank you for your help. Just so I understand, everything from the purchase/improvements/sale expenses gets used to calculate the adjusted basis, and then I'm using the sale price and the lower of either the 1) FMV at time of conversion to a rental or 2) adjusted basis to determine what gain or loss I declare?
I guess what I'm getting at is that there's no where else that I get credit for the improvements/sale expenses?
Improvements and sales expenses are added to the basis. You have to figure it both ways. See the calculation of gain and loss above. Sometimes, it ends up in a gray zone with neither a loss nor a gain.
TurboTax has me entering this info on Form 4797. Does that sounds right? One of the other sections seemed like it wanted me to try Schedule C instead, but it didn't seem to fit (was asking about things like cash accounting vs. accrual, a 2% threshold on the property's unadjusted basis, etc.).
Form 4797. You do not have a business. You are selling rental property.
Okay, thanks. The way some of the TurboTax questions were worded, I wasn't sure.
Final question (I hope!) -- it appears that the sale ultimately amounts to a reduction of my income, not taking a deduction, so I wouldn't necessarily have to itemize deductions?