How to report the sale of rental property that was converted from a primary residence?

[rodney1]

Purchased house in Sept. 2007 for $679,950, added $83,931 in remodeling improvements immediately after purchase. Primary residence from Feb. 2008 - Dec. 2008. Vacant for all of 2009. Placed into service as a rental in Jan. 2010 with a FMV of $559K (with land valued at $148,616). Rented from Mar. 2010 - May 2015. Prior Depreciation for 2010 - 2014 of $72,993. House sold in May 2015 for $670K. Settlement charges for the sale $34,756.

Basis for gain = $679,950 + $83,931 + $34,756 - $72,993 = $725,644

Basis for loss = $559,000 + $34,756 - $72,993 = $520,763

My understanding is that because the sale of $670K falls between the gain and loss, that there is no gain or loss on the sale of the rental house.

My problem is how do I report this information on turbo tax? I do have access to the forms.

Any help would be greatly appreciated!

Thank you!

[DS30]

You will enter this sale under the rental section.

Please note that because you rented the property for more than 5 years before the sale after the conversion date, you will not able to claim the home gain exclusion.

You are only allowed to take the gain exclusion as long as you considered the home your "primary residence" for 2 of the last 5 years.  You could live in it for two years and then rent it for three years and then sell it (so long as it is sold within the five year mark from when you first lived in it as your primary residence). 

See this IRS link for more information on the exclusion:

https://www.irs.gov/taxtopics/tc701.html

When if comes to the sale of your rental, if is important to determine the basis in the property (usually cost plus capital improvements less depreciation (less any casualty loss, if any)) because this will determine that amount of capital gain or loss. Rental income/expenses for the year (unless deprecation or expenses directly related to the sale) will not be included in your capital gain or loss calculation.

Additionally, when you sell your property, you must pay 25 percent recapture tax (also referred to as Section 1250 recapture) as well as regular state income tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return). .

To enter your rental sale under the rental section in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Business" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Business Income and Expense" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on” (Jump to full list)
4. Scroll down the screen until to come to the section “Rental Properties and Royalties”
5. Choose “Rental Properties and Royalties” and select “start’ (or “update” is you have already worked on this section)
6. If your rental property is listed, you will need to select "edit" to access this information. Otherwise enter your rental property information. (If you are entering your rental information for the first time, you will need to add the rental house as an asset under step 16)
7. Is This a Rental Property or Royalty? - choose rental and put rental information and address
8. What Type of Rental is This? - choose rental type (ie: Single family (home or unit where a single family lives))
9. Do Any of These Situations Apply to This Property? - select sold (screenshot #1)
10. Was This Property Rented for All of 2015? - answer questions based on your circumstances
11. Property Ownership - select your ownership percentage
12. Indicate if you Actively Participate - yes or no (If yes, this allows some of the passive losses to be used against passive income)
13. Did You Pay Anyone $600 or More for Work Related to This Property? - yes or no
14. Is Your Property in Any of These Designated Areas? - Usually "none of the above"
15. Review Your Rental Property Rental Summary (screenshot #2)
16. Select Sale of Property/ Depreciation section. Here is some additional information you will need to select under the sale of property section: 
1. About 3 screens in, if the house is listed under this section, you will select that you want to edit this property
2. About 4 screens more, check box that you sold the property under "Tell us about this rental asset" (screenshot #3)
3. For the special handling screen - say "no"
4. Home Sale - select "yes" if sale of main home.
5. Sales Information - enter the sales price information (screenshot #4) You will need to allocate the net sales proceeds into asset sale and land sale. If your proceeds are not allocated, you can use the same percentage of asset and land from the original purchase for the sales proceeds allocation

[rodney1]

Hi TurboTaxDeeS,
Thank you for the information. I followed your instructions and cannot get to "Tell us about this rental asset" (screenshot #3). I never see that screen when I follow your instructions.
Thanks.

[DS30]

This should be under the asset section under the rental summary page once you have entered the rental assets.

[Bachatera]

Hi @rodney1 , I'm in the same boat.  How did you resolve this?  Thank you.

[MarilynG1]

@Bachatera Click this link for instructions on How to Report Sale of Rental Property. 

[Bachatera]

Thank you.  I read through this link but couldn't find the answer.  Shall I report a loss (using adjusted cost at purchase) or a gain (FMV when converted to rental)?  In IRS Publication 544, it says to treat it as 0 (no loss and no gain) - if so, how do I enter that in TT?  @MarilynG1   

[MarilynG1]

@Bachatera  Per @MikeinSC:

"The tax law, as I understand it, will allow you to use your original cost vs the adjusted depreciable basis when computing this gain (you still need to recapture depreciation on the sale), but if adding the amount of the original reduction you made creates a loss, you cannot take this loss.  If you still have a gain after adding that amount back, you can use that in your basis.

I would add an amount as a separate item as a basis adjustment, as in a cost of the sale, to see if there is a gain or a loss.  If you have a loss you will have to reduce that amount, if you have a gain, you are good to go.

Sale will be reported on form 4797 to see the computation of gain/loss."

Click this link for more info that may help you with Sale of Rental on Form 4797.