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dcf1999
Returning Member

I have multiple questions. I sold my rental property.

First, I "paid forward" taxes for the new homeowner. Is that a deductible expense? if so, where do I enter them... under taxes or expenses?

 

I also owned the house before I converted it to a rental. Do I need to change the "date acquired" on the asset entry worksheet to reflect that? When I started using TurboTax, and did the questionnaire, I put the date that i acquired the asset to the date I converted it to a rental. 

 

I also didn't know what to do with the land portion, I don't ever remember the program asking how much the land was worth, so when I original went through the questionnaire, I put the amount of the house. Now I noticed that, on the 4797 it showed a huge ordinary gain because it wasn't computing the land basis. I went back to the Asset Entry Worksheet and changed the "total cost when asset was acquired" and entered the land value under "Total amount of land included in the cost". It seems to be correct now, but did I do this correct or does this need to be changed somewhere else?

1 Best answer

Accepted Solutions
MaryM428
Level 6

I have multiple questions. I sold my rental property.

  1. The forward taxes that you paid are added to the basis of the home.  Any other costs of buying and selling the property are also added to your basis.
     
  2. You are correct to use the date when the property was converted to a rental.
     
  3. When the property became a rental, the structure, but not the land depreciated.  That is why the entry was there for the building minus the cost of the land. 
     
  4. When you sell the house you are selling the land and the building so the land becomes part of your basis in the property.

Everything you have entered so far has been done correctly.

This is an article with steps on How to Record Sale of Rental Property.

View solution in original post

4 Replies
MaryM428
Level 6

I have multiple questions. I sold my rental property.

  1. The forward taxes that you paid are added to the basis of the home.  Any other costs of buying and selling the property are also added to your basis.
     
  2. You are correct to use the date when the property was converted to a rental.
     
  3. When the property became a rental, the structure, but not the land depreciated.  That is why the entry was there for the building minus the cost of the land. 
     
  4. When you sell the house you are selling the land and the building so the land becomes part of your basis in the property.

Everything you have entered so far has been done correctly.

This is an article with steps on How to Record Sale of Rental Property.

View solution in original post

Carl
Level 15

I have multiple questions. I sold my rental property.

When I started using TurboTax, and did the questionnaire, I put the date that i acquired the asset to the date I converted it to a rental.

That's actually wrong. The date acquired is the date your name was put on the deed. Weather or not the property was a rental at that time doesn't matter. However, there's no need to go back and correct this, because it has absolutely no bearing on any tax liability you may have incurred while you rented out the property, or when you sold it.

 

 Now I noticed that, on the 4797 it showed a huge ordinary gain because it wasn't computing the land basis. I went back to the Asset Entry Worksheet and changed the "total cost when asset was acquired" and entered the land value under "Total amount of land included in the cost". It seems to be correct now, but did I do this correct or does this need to be changed somewhere else?

You "may" have done it right. It depends on my interpretation of  your above statement. So to clarify.

COST - Here you enter the amount your paid for the property in it's entirety.

COST OF LAND - Here you enter the amount of COST that you are allocating to the land. Doing the math determines the value of the structure to be depreciated. Example:

COST: $100,000

COST OF LAND : 25,000

So by doing the math (which the program does in the background) the value of the structure is $75,000 and it's that value that gets depreciated over the next 27.5 years. If you change "EITHER NUMBER" (the COST box or the COST OF LAND box) that will throw off the value of the structure and totally screw up not only the current year depreciation amount, but the depreciation history also.  Here's what I think you did.

COST: $100,000

COST OF LAND: $0

So $100,000 was set up with a depreciation schedule to depreciate $100,000 over the next 27.5 years.

Now you've gone in and changed it to read:

COST $75,000

COST OF LAND: $25,000

Now now the program will show an incorrect amount of prior year's depreciation taken. It gives you the option to change that amount. So when you entered the "correct" amount of depreciation that was actually taken, it shows you took way to much depreciation is past years and most likely is taking very little (if any) depreciation this year.

Nortmally, I'd advise you to seek professional help to file the 3115 to correct this. But since you sold the property in 2020 it's kind of a moot point really. My advice would be to "change nothing" and just report the sale "as is". That way the chances of screwing up the depreciation recapture are reduced to zero. If you go changing numbers that will affec the history, you risk screwing up that recapture requirement and getting a nasty gram along with a tax bill from the IRS.

 

dcf1999
Returning Member

I have multiple questions. I sold my rental property.

Ok, I know what you mean and I didn't change the amount of deprecation over the years... 

 

Total cost of house was $172,000 and my accountant at the time set the basis at $153,000. So when I first used TurboTax and set up the rental stuff, I put the basis for the house (for deprecation) at $153,000. Now when I sold it, and I entered in the value for the land, it showed a huge gain for land because I never put the value of land in when I entered the property information. 

 

I went in and changed it on the worksheet to show the total of the asset to be $172,000 and the land portion to $19,000 which left the basis for the property at $153,000 and not change the deprecation over the years. Now on the 4797, it shows, what I believe, correct. 

 

In part I, under "Sales or exchanges of property..." it shows the land and the correct sales price and basis.

In part III, it shows the house under property A and the correct numbers that I entered. 

Carl
Level 15

I have multiple questions. I sold my rental property.

I went in and changed it on the worksheet to show the total of the asset to be $172,000 and the land portion to $19,000 which left the basis for the property at $153,000 and not change the deprecation over the years. Now on the 4797, it shows, what I believe, correct.

Great! You're actually fine then. Since the land is not a depreciated asset, increasing the COST by $19,000 and then entering $19,000 in the COST OF LAND box, retained the original structure value being depreciated. 

Make sure you keep all your historical paperwork to support your change. I don't know if the IRS would question it or not, and I doubt they would. But if they do at any time in the future, you need to be able to prove your numbers.

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