How to elect OUT of installment treatment on capital gains on sale of rental property

[ikenacornett]

I want to elect out of installment sale treatment on the long-term capital gains on my rental property.  It was sold in January, last rent payment in November of the prior year so no rental income this year.  I entered $1 rental income - is that necessary?  I treated it as the sale of a second home so that all of the capital gains would be counted this year - is that okay?  I will report the seller-finance interest income on Schedule B but I do NOT have the SSN of the payer.  I have NEVER depreciated the rental property, only reported rental income and expenses in the past.  

[Coleen3 · Accepted solution]

No, you can't change the year you wish to report a gain. The Installment Sale Form 6252, is used when the payment for the sale of property is spread over more than one year. If you sold the property in 2017, you report the entire gain in 2017. You will need to amend your last year return if you did not report the gain. It is a rental property, not a second home if you rented it at full rental value.

If you did not take depreciation on rental property, you have two choices. You can take your lumps and recover it without every having deducted it in the first place or you can choose to change your accounting method on Form 3115.

Unfortunately the depreciation recapture is "allowed or allowable" meaning even if you never depreciated it, you would still have to recapture the depreciation. Depreciation taken would be on line 18 of Schedule E.

One solution is to elect an accounting method change and file a Form 3115 in the current year and take the  prior depreciation as a section 481(a) adjustment. [land  value is separated, land is not depreciated]

Below are the IRS links related to the change in accounting method. TurboTax does not have that form.

May be these will help

Form 3115, Application for Change in Accounting Method

http://www.irs.gov/uac/Form-3115,-Application-for-Change-in-Accounting-Method

Instructions for Form 3115 (03/2012) 

http://www.irs.gov/instructions/i3115/index.html

Form 3115,

http://www.irs.gov/file_source/pub/irs-pdf/f3115.pdf

[ikenacornett]

I think I need to ask a point blank question. How do I opt out of installment treatment of capital gains for owner financed sale of rental property.

[ikenacornett]

Ps. How can there be depreciation if there is capital gains

[Coleen3]

Electing Out of the Installment Method
If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you don’t receive all the sale proceeds in that year. https://www.irs.gov/publications/p537#en_US_2017_publink1000221634%22%3Ehttps://www.irs.gov/publicat...

There can be both capital gains and depreciation recapture.

[ikenacornett]

Thanks.  What turbotax questions do I answer and what answers do I give in order to opt out and report the entire capital gains in the year of sale?

[Coleen3]

When did you sell this? 2017 or 2018? If you have not already put any entries on Form 6252, you don't do anything. Opting out means not filing the 6252. If you had one for 2017:
Revoking the election. Once made, the election can be revoked only with IRS approval. A revocation is retroactive. You won’t be allowed to revoke the election if either of the following applies.
One of the purposes is to avoid federal income tax.
The tax year in which any payment was received has closed.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p537#en_US_2017_publink1000221640">https://www.irs.gov/publications...>

[ikenacornett]

Sold in January 2017.  Last rent November 2016.  No rental income or expenses in 2017.

Where / what screen do I use to tell TurboTax to NOT file the 6252?  Thanks.

[Coleen3]

You don't. Just enter the sale in sales of business property. The 6252 is not selected automatically and you don't have to specifically tell the IRS your plans. Just report the sale.

[ikenacornett]

Should I delete the rental property?  Or leave it and report it as $zero income and $zero expenses.

[Coleen3]

Delete Sch E since it was not a rental in 2017.

[Coleen3]

Make sure you have all your depreciation totals before you delete anything.

[ikenacornett]

Okay - my depreciation total is $0.  TurboTax did not object when I entered zero.  Thanks for sticking with me on my questions.

[Coleen3]

My pleasure! Turbotax did not object because the program does not know one number from another and assumes you know the number. You need to enter the dollar amount of the depreciation that you have taken over the years.

[ikenacornett]

I did.  I have never taken depreciation over the years.