How does Turbotax calculate income when selling a rental property?

[mtischer]

How does TurboTax calculate income for my condo sale?

• I am 71 yrs old.  Wife 61 yrs old
• Both Retired
• Only income is Social Security ($17,000)
• Married filing Joint for past 25 yrs.

• 2013 Bought a condo cash for $240,000
• 2014 Renovated condo for $93,000 cash
• Feb 2015 rented condo. 
• Entered renovation expenses $93,000
• New cost basis: $333,000
• April 2018 eviction in progress.  No income
• June 2019 eviction complete. No income
• Jan 2020 condo for rent but no takers.  No income.
• July 2020 sold condo for $349,000

Using Turbo Tax 2020 I get the following results after the sale:

            Total Income: $65,600

            Taxable Income: $36,930

            Tax Due: $2700

Question:  Is it actually possible to end up with anything close to $65,600 income after the sale when the property produced no rent for 1-1/2 years, and cost $93,000 to renovate?  Comments welcome.  Anybody.  Thanks! Mark

[ErnieS0 · Accepted solution]

Yes. Profit and loss from the sale in not related to rental income or expense.

Profit and loss is: Sales price – sales expenses – (cost + improvements – depreciation)

There's a lot of data missing, including the purchase and sale dates, cost of land, sales expenses, etc. but using your numbers and adding a deprecation amount to make it "work"", you get:

Sale Price $349,000

Cost -$240,000

Renovation -$93,000

Depreciation $49,600

Total Income $65,600

[AmeliesUncle]

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@mtischer wrote:

• New cost basis: $333,000
• July 2020 sold condo for $349,000

Using Turbo Tax 2020 I get the following results after the sale:

            Total Income: $65,600

            Taxable Income: $36,930

            Tax Due: $2700

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You were eligible to claim depreciation while it was a rental.  That lowers your Basis.

So let's say you were eligible to claim $40,000 in depreciation.  Your Basis is now $293,000, and after the selling price your gain from the sale would be $56,000.

Your "total income" may also be from your Social Security.  Some of your Social Security may become taxable if you have enough 'other' income.

[Carl]

What you may not be taking into consideration here (and many don't) is the fact that when you sell the property you are required to recapture all depreciation and pay taxes on that recaptured depreciation in the tax year you sell the property. Recaptured depreciation also increases your AGI and in some cases can quite easily bump you into the next higher tax bracket.

On top of that, when some types of "other" income outside of social security exceeds a certain thresh hold, then up to a maximum of 85% of your social security becomes taxable too.