How do you account for the sale of a capital asset (roof and gutters in my case) when selling a rental property?

[LordoftheLand]

Under the assets section of the property, I have the property and an entry for the new roof and gutters. The original cost for the roof was $7,000 and it's been depreciating for the last 3 years.
Now that I've sold the house, I entered the sale price and expense on the property but I have to close, or somehow include the roof. TT won't let advance without putting a sale price on the roof (I tried $0). Preferably I'd like to account for the loss to decrease the gain/ tax burden.

[Carl]

As you know, the property itself has two components, each with their own cost basis. First is the land. For reporting the sale, you will not change or allocate the land sales price under any circumstances.

But the structure sales price has to be allocated across all other depreciable assets. The below contains pertinent information about the "how and why" of allocating that structure sales price.

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 ahve a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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 it it's zero. Then you MUST work through the "Sale of Assets/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. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

If you show a gain on some assets and a loss on others, the program just flat out can not deal with this "correctly" in every situation. It will in some, but not all. So that's why I recommend you assume the program will not handle your specific situation correctly, when reporting the sale of rental property with multiple assets included in the sale.

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" 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.

[LordoftheLand]

Thank you @Carl .

As far as this property, I have two asset entries; one line item for the property (asset & land) and one line item for the new roof. Based on your response, I should have/ add another asset for the sale of the property. Is that correct?

I guess there's only one item for the property because I only tracked depreciation of the asset, not the land.

This still leaves the roof asset.

So I sold the house for 432K and paid 23k in fees. Based on my property tax bill, the land is valued at 20%. My plan is to allocate 80% of the gain and fees to the asset and 20% to the land. Should I 'sell' the roof for a $1 since it's part of the house and lose the remaining depreciation?

[Carl]

As far as this property, I have two asset entries; one line item for the property (asset & land) and one line item for the new roof. Based on your response, I should have/ add another asset for the sale of the property. Is that correct?

No, you will *NOT* add a third asset entry. That would be totally wrong.

Based on my property tax bill, the land is valued at 20%

For reporting the sale, you can burn the property tax bill. it's totally and completely irrelevant.

My plan is to allocate 80% of the gain and fees to the asset and 20% to the land.

Percentages are irrelevant. Since you sold the property at a gain, you *MUST* show a gain on each individual asset. Elect to edit the property itself. See the COST and LAND boxes? Now the amounts in those boxes, you will *NOT* change under any circumstances and with no exceptions.

What's in the COST box is your cost basis for the "ENTIRE" property - land and all. What's in the LAND box is how much of the amount in the COST box is allocated to the land. Subtract LAND from the COST and that's the amount allocated to the structure. It's also the amount that your depreciation has been figured on since you placed the property in service.

For allocating your sales price, your sales price for the land must be "at least" one dollar more than the cost of the land that you see in the "LAND" box.  Then what you have left over is allocated between the structure and the new roof, ensuring that you allocate so that "BOTH" the structure and the new roof show a gain. It flat out does not matter if you show a $500K gain on the structure and a $1 gain on the roof. But since you sold at a gain, you must show a gain and each and every single asset even if it's only a $1 gain.

To make it easier, you only need to allocate your sales expenses on the "main" asset between the land and the structure. That makes your sales expenses on the roof, zero. The IRS isn't overly picky about allocation of sales expenses. So if you want to do a 20/80 split between land and structure, that's not a big deal. Easier math on the brain that way to ensure you actually show a gain on all assets after deducting your sales expenses.

Should I 'sell' the roof for a $1 since it's part of the house and lose the remaining depreciation?

No. Do that, and you've sold the roof at a loss and the remaining asset at a gain. You need to allocate your sales price so that the roof is sold for "at least" $1 more than it's cost as shown in the COST box on that specific asset. Allocate a sale price lower than what you paid for it, and chances are, the program will screw that up mathematically and you'll never know it and never be able to figure out why your return continues to be rejected by the IRS so matter how many times you try to e-file.

[LordoftheLand]

Thanks @Carl that did the trick. I had a bit of a hangup on the SCH E 46 entry, but once that got ironed out the check completed without errors!

[illinette2012]

I sold a rental property and included the sale under Rentals and Royalties. Reading through your replies to others, I showed a gain on each asset like water heater, roof, and equipment I depreciated. On the Sales Information Page I put in the asset sales price separating structure from land. I also calculated the expenses for each. My question....am I paying double capital gains as assets such as roof and water heater are already included in the price on the sales information page and then shown as sold for a gain on the rental assets and depreciation page.  Help!

[JamesG1]

I do not think there is 'double' capital gains.

The rental property has been sold.  You have allocated the selling price of the property over the rental structure and the rental property land as well as the other rental property improvements.

As an example, your rental property assets may be represented by the following:

                                                    Basis           Sales Price   Gain

Rental property structure       190,000       228,000      38,000

Rental property land                 10,000         12,000         2,000

Roof replacement                      25,000         30,000         5,000

Kitchen remodel                         25,000         30,000         5,000

Total cost basis                          250,000      300,000       50,000

You will allocate the $300,000 selling price over the $250,000 cost basis for the entire asset.  There should be no 'doubling' of capital gains.  

The amount of the gain will be spread over different types of assets (land, buildings, improvements, etc.) which allows for different tax treatments for the different kinds of assets.

 @illinette2012 

[illinette2012]

I have read posts that I must show a gain on each asset since I sold the property for a profit. Is that accurate?

How do I calculate what that gain will be to allocate to each asset? 

On the Sales Page of turbo tax,  am I supposed to put in not the actual sales price we received  for structure and land, but the sales price  I calculated for structure and land (subtracting roof, water heater, etc)? I separated selling fees between land and home. 

The equipment that was used and depreciated to maintain the rental will now be converted to personal use, like mower or chainsaw.  They are not included in the basis right?  I chose "special handling" in the program for those.  

If I can get specific responses to get past this assets page and figuring basis, and which blanks in the program they go in, I won't have to go to our attorney instead who I have scheduled. I am not confident in the sale of the rental property section, especially the assets being recaptured I placed there and finding correct basis. Thank you for your help.

[DianeW777]

You can use the information and example below to enter your sale. 

The selling price should be prorated for each asset then entered for each asset when you indicate they were sold or disposed of. You will not lose the remaining depreciation because you will use the remaining basis against the selling price to determine gain or loss. 

To figure out the selling price for each asset:

1. Take the current basis of each asset against the total combined basis of all of your assets to figure out the sales price for each one; OR 
2. Determine a fair market value for each asset against the total value of all assets to figure out the sale price for each one. 

Use the original cost of each asset listed on depreciation (or fair market value (FMV) at the time of sale), 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. (Choices would also be fair market value on the date of the sale or adjusted basis on the date of the sale, which is cost less depreciation.)

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.

I hope this example provides clarification to enter your sale. If you have not used TurboTax, enter each asset exactly as it appears on your prior year return.

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

1. Click on Wages & Income
2. Scroll to Rental properties and royalties, click Edit/Add or Start/Revisit
3. Do you want to review your rental?, click Yes
4. Under Rent and Royalty Summary, click Edit
5. Click Update to the right of Assets/Depreciation.
6. Do you want to go directly to your asset summary?, click Yes and Continue
7. Click Edit to the right of each asset to be disposed of/sold
8. Go through several screens until you get to Tell Us More About This Rental Asset
9. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

@illinette2012