How do you calculate the Business Portion of an asset sales price for the sale of a rental property? And where does the non-business portion of the sale get reported?

[seeker1308]

I bought a home in 2012, converted it to a rental property in 2015, and sold it in 2017. From the time I converted it, it remained a rental until it sold. Is the "Business Portion" of the asset sale 100%, or is it the % of time it was a rental from 2012-2017? If it's the latter, where do I record the remaining portion of the sale?

[DanO · Accepted solution]

The sales is completely business and the sale of rental property would be reported on Form 4797.

When selling a converted rental property, you need to be aware of three things:

• Your adjusted basis in the property, both at the time of conversion and at the time of the sale.
• The sale price.
• The fair market value of the property when it was converted to a rental property.

The adjusted basis at the time of conversion and the fair market value at time of conversion are needed when determining the gain or loss from the sale.  The value of property is for the rental building only, not the land it sits on.

If the property is sold at a gain, the basis used in determining the gain is your adjusted tax basis at the time of sale.  However, if the sale results in a loss, the basis is the lower of the property's adjusted tax basis at the time of conversion or the fair market value of the property when it was converted from personal use to rental.

For example:

James converted his residence to a rental property, Original purchase paid, $420,000 for the property.  The land was assessed at $50,000 and the home was $370,000.  When James converted the home into a rental, the fair market value was $550,000 with $60,000 of that for the land.  Five years later he sells the property for $600,00.

This is what it would look like:

1. Original cost                                                                                $370,000
2. FMV at conversion                                                                      $490,000
3. Depreciation taken                                                                      $  85,000
4. Adjusted basis if sold at gain (#1 - #3)                                        $285,000
5. Adjusted basis if sold at loss (less of #1 - #3 or #2 - #3)            $285,000
6. Sale Price                                                                                   $600,000
7. Capital Gain (#6 - #4)                                                                 $315,000

See TurboTax FAQ here for instructions for Form 4797

[seeker1308]

Thank you for the detailed answer. Would it be correct to say this would be moot for this rental property if it qualifies as a primary residence at the time it was sold?

Also, out of curiosity. under what circumstances DOES Business portion come into play?

[DanO]

If you would have owned and lived in the property as residence for two years and then sold it, you could have taken the tax deduction $250,000 or $500,000 if married filing jointly.  There is nothing to do now.

A business portion would be the amount of the total property or asset that is used for producing an income as opposed to personal use.  Assets that are used for business could be depreciated to reduce taxes, for instance.

[seeker1308]

I did live in the house as my primary residence for 2 of the last 5 years (2012-2015). But just because I can take the exclusion, doesn't mean I have to, right? Especially if I plan to sell another primary residence with a bigger gain before 8/2019.

[DanO]

That is correct, you will meet the IRS rules to exclude some to the gain on the sale of the property.
This will take some work on your part to calculate but the instructions are here with worksheets.
In a nutshell you will need to:
Figure your overall gain on the sale of the property
Figure out the taxable gain on the sale of the property.  This is where you allocate personal home and rental use.
Figure out what portion of the gain is taxable as ordinary income and capital gain income.

This link is for IRS Pub 523 Selling Your Home has the necessary worksheets and instructions to figure this out.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p523.pdf">https://www.irs.gov/pub/irs-pdf/p523.pdf</a>