how to enter sale of property rented to daughter

[cavetroll]

Apologies in advance, my eyes are starting to cross and I'm not seeing the forest for the trees.  We bought a house for my daughter and husband, renovated it and they've basically been paying the mortgage each month (so basically rent) and then purchased it from us once the renovations were done.   We paid 66000 for it and gifted some equity once it was done (13,200).  the price they paid was also 66000 (less the equity gift).  we put around 10K into it to make it livable.  we purchased in 12/2019 and they purchased it from us in 07/2021.  Any advice?  Where and how do I need to report this?

[LeonardS]

Could you please clarify if: Did you report the mortgage payments as rental income?  Was the mortgage payment amount equal to the fair market rental for similar properties.

[cavetroll]

At the moment i am putting the info in turbotax that the 500$ is rental payment.  The mortgage was 500$/month which they paid to us and we paid the bank.  They basically were paying the mortgage for the house during the renovations and up until they took over payments officially by buying the house.   we bought the house with a home equity line of credit at auction.  renovated it so it could be eligible to purchase with a regular home loan.  they were able to use the equity put into the house as a down payment.  i'm assuming renting a 900 sq ft house would be more expensive than the $500/month, at least in our town so they were probably paying less than fair market value if they had rented the same size space somewhere.

[ColeenD3]

You had a not-for-profit rental. You must also file a gift tax return if the amount of the gift was over $15,000. The sale is reported in the Investment section as a second home.

Not Rented for Profit

If you don’t rent your property to make a profit, you can’t deduct rental expenses in excess of the amount of your rental income. You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Where to report.

 Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8. If you itemize your deductions, include your mortgage interest and mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

[Hal_Al]

It's still not clear; did you actually report the rent as income on your 2019 and 2020 tax returns? You were not required to. 

Assuming you didn't; you report to the sale as the sale of a 2nd home, showing $66,000 as the sale price and $66,000 as the cost basis, for 0 capital gain.  Technically you should report the $76K (66K + 10K) as the basis and then take a $10K adjustment because you are not allowed a deduction for a loss on personal use property or property sold to a relative.  But using $66K basis keeps it simple.

You daughter uses the $76K basis for the future. 

Since the gift of equity is less than $15K, no gift tax return is required. 

[TomD8]

You don't have a rental property; you have a second home.

When you rent to a family member below fair market value, every day the family member rents the property is considered a day of personal use by you.  A property is not considered rental property if the owner has more than 14 days of personal use.  In that situation, the only allowable deductions are for mortgage interest and property taxes.

In TurboTax, the sale of a second home is entered in the Investment section.