How is the final total federal depreciation deduction on the sale of a residential rental property calculated?

[orders]

I sold a residential rental property in Maryland as a non resident, while earning money in NY and living in NJ. The sale price was $650,000 and the net gain on the property sale after additions and subtractions was $411,000. MD withholdings at the settlement were $28,996. For some reason there is a large federal depreciation deduction of -$761,100 (on the MD fed/state adjustment summary worksheet). Maryland form 505SU Part 1 line BB thus shows a net subtraction modification to MD income of -$785,716. The result is a net negative income in MD and I don't owe any tax on the sale. This seems strange.

Does anyone know how the large federal depreciation deduction is determined? I can't find any clues anywhere.

If it helps, NYS IT-398 also shows a large federal depreciation deduction of -$799,166 (on  this amount includes $38,166 of accumulated federal depreciation). 

[AmandaR1]

You are correct, that this doesn't sound right. Maryland will tax gain on non-resident real estate sales and these state depreciation adjustments look far out of balance compared with your federal accumulated depreciation. 

First, I'd check to make sure that under the Personal Info tab, you selected that you earned income in another state and indicated Maryland and New York. Then, review your entries for the sale of rental real estate in the Federal section.  For real estate sales, you should be asked about State depreciation adjustments, when reporting the sale. 

Lastly, under the state sections, you could review your entries and assure you don't find large adjustments. You should be sure to update your state returns in the following order:

1. Non-resident NY return
2. Non-resident MD return
3. Your resident return

If you didn't do so, or if you make any changes when following the above steps, you should delete the states and then add them back in. You can do so on the State Taxes summary screen, by clicking Delete next to each state. 

If you are unable to solve the issue with the steps above, I would recommend contacting our live support, so that they can go through your return with you.  To do so, select the software you are using and follow the steps below: https://ttlc.intuit.com/replies/3300041

[rrandall0819]

Hi, I wanted to ask if you have the answer to your question. I have a similar situation right now. Thanks.

[518k]

I've experienced the same issue. I'm a nonresident that sold an investment property in Maryland, had $4.5k (8%) withheld at sale,  and now I'm getting seemingly incorrect results on TurboTax's Maryland state return. For me, in TurboTax, Maryland Form 505 line 7 capital gains is $16.7k and line 23 other is -$80.5k with the code letters BB. This yields a negative net income and the full amount of the MD withholding shows as a refund. Meanwhile, outside of TurboTax, I manually filled out Maryland Form MW506R and calculated line 9 estimated gain to be $16.7k (equal to the capital gains amount in TurboTax) and line 13 tentative refund to be $1.3k of the $4.5k withholding. Has anyone gotten resolution on this issue yet?

[Critter-3]

A DIY program is good for the usual situations however a sale of a rental could go south fast with one wrong key stroke so I highly recommend you either upgrade to the LIVE option to get professional assistance   OR  seek local professional assistance asap. 

[Carl]

Just a note for all following this thread.

When dealing with multiple state tax returns, you *MUST* do your resident state return *LAST*.

Many states have reciprical tax agreements so that you are not double-taxed on your income. The TurboTax program can and will account for these agreements correctly *ONLY* if you do your resident state tax return *LAST*.  If you do not do the resident state return last, then the program will *NOT* "do the math" to take any tax agreements into account.

If it is a case where you have already completed your tax return and you did not do your resident state return last, then the simplest way to deal with this is to completely and totally delete the resident state return from the program, and re-add it. Deleting the information in your resident state program module may not be enough. You should delete the state module program *ENTIRELY* and re-add it anew. Then do your resident state tax return over from scratch.

To delete the resident state module in the desktop version of the program, open the program and open your tax return so you can edit it. Then click FILE and select "remove state return".   Then save your return, exit the program and re-start the program and open your tax return again. Now click ONLINE, select "Download State" and go from their to reinstall the resident state module program and start your resident state return over from scratch.

[518k]

Thanks for the note, @Carl. This may help with other problems, but I don't believe it will resolve the underlying issue here because I do not have multiple state tax returns. The underlying issue seems to be that nonresidents that sold Maryland property are getting erroneous TurboTax calculations on Maryland nonresident income tax returns. Specifically, severely overstated subtractions from income listed as "BB Net subtraction modification to Maryland taxable income when claiming the federal depreciation allowances from which the State of Maryland has decoupled" are originating on Maryland forms 500DM/505SU (decoupling modification/nonresident subtractions from income) and then showing up on Maryland form 505 (non resident income tax return). This is leading to all of, instead of most applicably a partial amount, of Maryland's taxes withheld at sale showing up as a refund. This discrepancy needs to be resolved. I will take @Critter-3's recommendation and seek live professional assistance.