I purchased a house in 2004 and converted to rental in 2014. I had to enter FMV as depreciation cost basis as it's lower than orig. cost. How do I adjust it for the sale?

[douermom]

I sold the house in 2025. And turbotax automatically uses the depreciation cost as basis for capital gain. How do I enter my original cost and improvements as the cost basis? Of course, I know that depreciation should be included to reduce the cost basis.

[MaryK4]

Instead of entering the sale details directly within the Schedule E "Rental Property" section, report it under Wages & Income > Business Items > Sale of Business Property.  This section allows you to manually enter the Asset Basis (your original cost + improvements) and the Total Prior Depreciation separately.

TurboTax will then correctly subtract the depreciation from your higher cost basis.

[douermom]

Thanks for the advise. Unfortunately, I had gone thru the schedule E interview questions, and entered the sales info there (the screen asking asset sale price, expenses, for building and land separately).  And it created the asset worksheet with the incorrect cost basis, and I can't seem to modify it.

[DaveF1006]

It appears that TurboTax defaulted to the Fair Market Value (FMV) at the time of conversion because it was lower than your original cost. To fix this and ensure your original cost and improvements are captured, you have two main options.

Option 1: The "Clean Slate" Method (Recommended)

The most reliable way to fix the basis is to delete the sale information from the Rental section and re-enter it correctly.

1. Delete the Sale from the Asset: Go back to the Rental Properties and Royalties section. Go to Assets/Depreciation. Edit the property/building asset. Uncheck the box that says "I sold or disposed of this asset." This will stop the Schedule E from trying to calculate the gain. 
2. Navigate to "Sale of Business Property": * Go to Wages & Income > Other Business Situations.
3. Select Sale of Business Property (this corresponds to Form 4797). 
4. Enter the Basis Manually:

• Description: "Rental Property [Address]"
• Date Acquired: Your original 2004 purchase date.
• Date Sold: Your 2025 sale date.
• Cost Basis: Enter the sum of your Original 2004 Purchase Price + Total Improvements since 2004.
• Depreciation: Enter the total depreciation you actually took (or could have taken) from 2014 to 2025.

Option 2: Updating the Asset Entry

If you want to keep the sale within the Rental Property section, you must edit the Asset itself, not the sale screen:

Go to the Asset Summary in the Rental section.

1. Edit the "Building" or "House" asset.
2. Look for the screen titled "Cost of Land and Buildings." 4. Even if you've already started the sale, you can usually edit the Cost field here.
3. Important: Per IRS rules, your basis for depreciation is the lesser of the FMV at conversion or your original cost. However, for calculating a gain, your basis is your original cost + improvements.
4. If TurboTax isn't letting you change the cost, delete the asset entirely and "Add an Asset." Enter the correct 2004 cost and 2014 conversion date.

[AmeliesUncle]

Any chance you are using the desktop/downloaded version of TurboTax (which is SO much better and more reliable than the online versions)?

I don't know if the program asks you the proper questions for that (I'm assuming not because you didn't see it).  But the desktop/downloaded version has access to the "Forms" and worksheets, and there is a line specifically for your situation in the disposition section of the Asset Entry Wks.

[douermom]

Also noticed this: I have a large K-1 loss, which made my total rental and k-1 incomes to be negative. When I have the sale of rental property entered in schedule E, it allowed all the loss, and put the loss in line 8 on form 1040. Is it correct?

[AmeliesUncle]

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@douermom wrote:

 When I have the sale of rental property entered in schedule E, it allowed all the loss, and put the loss in line 8 on form 1040. Is it correct?

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While we can't be sure without seeing everything, it is common.

The sale of your Passive Activity (the rental) allows any suspended Passive Losses to be used.  If you had suspended losses, yes, it is common that will trigger a negative income for the rental (which starts on Schedule E, then flows to Schedule 1, and eventually shows up on line 8 of Form 1040).

[douermom]

If the loss is from the sold rental property, the yes, it should be allowed i think. But the loss is largely from K-1, is it also allowed?

Also, it seems if instead of entering the sales info on schedule E, by entering on Sale of Business property section as suggested by previous reply, it only allowed rental loss from sold property, not the remaining K-1 loss.

This is confusing. Which is correct?

[AmeliesUncle]

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@douermom wrote:

But the loss is largely from K-1, is it also allowed?

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Why might the loss not be allowed?  Is it a Passive Activity?  Is there enough Basis to allow the loss?  Something else that may be suspending the loss?

[douermom]

The issue is that if I enter the sale via "Sale of Business Property" Section, It doesn't include gains from the sale as part of passive income, and it disallows the excessive loss from K-1. But if I enter the sale via schedule E, it allows the excessive loss (flowing to 1040 line 8), but the capital gain calculation is incorrect, uses FMV not original cost+improvents

[AmeliesUncle]

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@douermom wrote:

The issue is that if I enter the sale via "Sale of Business Property" Section, It doesn't include gains from the sale as part of passive income, and it disallows the excessive loss from K-1.

But if I enter the sale via schedule E, it allows the excessive loss (flowing to 1040 line 8), but the capital gain calculation is incorrect, uses FMV not original cost+improvents

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Personally, I would get rid of the stripped-down/problematic online version and use the desktop/downloaded version.  You can report it in the rental section, then enter the actual Basis using Forms mode there (on the Asset Entry Wks).