If I sold a rental property but used as personal residence for 2 years, what do I need to report?

It depends on your rental activity during the year and when you last considered this house as your primary residence.

• Under the rental section - if rented during 2016
• Under the sale of business property - if not rented during 2016

Additionally, when you sell a property that was used as a rental, 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).

In order to calculate the capital gain or loss when you sell a residence that had been converted to rental property, you need to know three things:

• Your adjusted tax basis in the property (both at the time of the conversion and the time of the sale)
• The sale price
• The fair market value of the property when it was converted to rental property

If the converted property is later sold at a gain, the basis for purposes of determining the capital gain is your adjusted tax basis in the property at the time of the sale. If the sale results in a loss, however, the basis used is the lower of the property's adjusted tax basis at the time of the conversion or the fair market value when the property was converted from personal use to rental property. This loss rule ensures that any deflation in value occurring while the property was held as a principal residence does not later become deductible upon your sale of the rental property; a loss on the sale of a principal residence is not deductible. As usual, you calculate your capital gain by subtracting your adjusted basis from the sale price of the property.

Click this link for further information about reporting the sale of a capital asset

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
10. Was This Property Rented for All of 2016? - 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
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"
3. For the special handling screen - say "no" (Please note that if you used FMV at the time of conversion to a rental for your depreciation (as opposed to adjusted basis), you will want to answer "yes" here and enter the sale under the sale of business property section (see below).)
4. Home Sale - select "yes" if sale of main home.
5. Sales Information - enter the sales price information  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

To enter this rental sale under the sale of a business property in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Business" tab ("Federal Taxes" tab in Premier)
2. Next click on “Business Income and Expense" ("Wages and Income" tab in Premier)
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 “Less Common Business Situations” ("Business Items" in Premier)
5. Choose “Sale of Business Property” and select “start’
6. Select "Sale of business or rental property that you haven't already reported"
7. Sale of Business or Rental Property - yes
8. Enter all the information about your Rental Property Sale here
1. Description - address of property
2. Date acquired - original acquisition date
3. Date sold - date of sale (should be on 1099-S)
4. Total sales price - total sales price (should be listed on 1099-S)
5. Cost of property (or tax basis) plus expenses of sales - original cost plus any capital improvements plus expenses of sales
6. Depreciation taken on this property - total depreciation taken property when rental (Please note the IRS will assume that you have taken the correct depreciation on your rental property while your property was available for rent regardless of whether you have actually take it or not)
9. What type of property is this? - select - Rental estate that I took depreciation on.
10. Installment sales - no if not on installment sale
11. 2 screens that show the summary of what you have entered for your property sale
12. Sale of Other Business Property - Choose yes if any of these situation apply, otherwise choose no.
1. You sold property that cannot be depreciated such as vacant land, mineral rights or inventory
2. You sold business or rental property that you owed for one year or less
3. You sold business or rental property at a loss.
13. Total Gross Proceeds - enter your 1099-S sales information here (this could be the same amount that was reported earlier as sales price)

For the sale of personal residence

You will not be allowed to take a capital loss for a personal use capital asset. Also there is no reporting requirement if the property meets the home gain exclusion (unless you received a 1099-S or took depreciation on the home in a prior year).

You can take the gain exclusion as long as you considered the home your "primary residence" for 2 of the last 5 years. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse

To enter the sale of your home in TurboTax Online or Desktop, please follow these steps:

1. Once you are in your tax return, click on the “Federal Taxes” tab ("Personal" tab in TurboTax Home & Business)
2. Next click on “Wages & Income” ("Personal Income" in TurboTax Home & Business)
3. Next click on “I’ll choose what I work on”
4. Scroll down the screen until to come to the section “Less Common Income”
5. Choose “Sale of Home (gain or loss)” and select “start’

I am confused by your answer. I have the same scenario as below. I didn't rent the house until Mid 2017. So do I enter the sale of the property in 2 sections or 1 section:

• To enter this rental sale under the sale of a business property in TurboTax Online or Desktop
• For the sale of personal residence

I read the below that I should enter the information into both of these sections. But since I lived in the house 2 of the last 5 years do I not enter it as a sale of business property? Thanks for clarification

If it was not rented in 2019, you will need to enter it either in Sales of Business Property or Sale of Main Home. 

Sale of Main Home has an area to enter your depreciation. You will encounter this in the interview.

Depreciation After May 6, 1997

Did you do either of the following with your home at 222 Main after May 6, 1997?

-Take a home office deduction

-Rent out all or part of the home

Depreciation After May 6, 1997

Enter the total amount of depreciation you deducted (or were allowed to deduct) on this home after May 6, 1997. If you claimed depreciation in 1997, calculate the depreciation for the part of the year after May 6, 1997.

Note:Only report here depreciation that was NOT reported as a separate business sale.

Depreciation After May 6, 1997

AMT Depreciation After May 6, 1997

This comment help me with accounting for my sale of a residence turned into a rental unit.

I have the same scenarios and confused by the answer.

I purchase the home in 2008 as primary residence until 2018. 

Rented the house mid 2018, then sold in 2021. I was reading the capital gain, I met the exclusion? How I do file? Under business sale ? or sale of home?

Since you have prior use of the home as your personal residence and you have rental activity you will pay tax on some of the gain even if you meet the exclusion.  Depreciation expense must be recaptured, then some of the gain will be excluded. 

• Do not enter under Sale of Home or Sale of Business Property, instead follow the instructions below.

If the home is currently set up as a rental on your return at the time of sale, then you need to complete the sale in the rental asset or assets.

You will select the home and each asset if there are others to indicate it was sold.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

You will need to answer "No" to Special Handling to answer the questions about using it as a home On the next screen you will be asked 'Was this asset included in the sale of your main home?'. Select Yes and then follow the screens to finish the reporting of your sale.

TurboTax will allocate the proper taxable amount due to the depreciation from the gain on the sale, only gain that exceeds this will be eligible for the exclusion.  You will not see 100% of the gain excluded, even if the total gain is below $500,000 for married taxpayers.

@tychivo 

[Edited: 04/05/2022 | 10:03a PST]

so I received form 1099-S. What shall I do with the form?

If you receive an informational income-reporting document such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable. Additionally, you must report the sale of the home if you can't exclude all of your capital gain from income.

There is not a specific place to enter a 1099-S.  It is determined by the circumstances.

Sorry For asking many questions. Sale price is the gross proceeds correct? If I'm reading the definition by Turbox taxes, stating that the cash amount I received, not sure what it means. Also- can you claim sales expenses? if so, I don't see Turbo taxes substract that from sale price - cost basis. Unless I'm doing something wrong.

Yes, sales price and gross proceeds are normally the same number.

If there isn't a box for Selling Expenses, add those to your cost basis. Here is a list that may be helpful: Selling Expenses

In summary:

Gross Proceeds - Selling Expenses - Cost Basis = Profit (loss) on sale.

Note that a mortgage payoff may reduce the cash you received, but that is not included in the calculation of your profit/loss on the sale.

No, you do not need to separately report for the period it was used as a home. 

Yes, you can enter the sale one time in the 'Rental Properties and Royalties' section of your return. TurboTax will allocate the sale appropriately because it's a matter of the tax treatment of the gain.

If there were renovation costs that were done after rental activity finished and before the sale, they should be entered as sales expenses because you are not allowed to add an asset and remove it from service in the same tax year.  However, if you made capital improvements to the condo (remodel as example) while it was being rented, it should have been entered as another depreciable asset.  The tax law requires depreciation allowed or allowable which simply means use it or lose it.  It must be treated like you did take the required depreciation expense each year.  If this is the case then you should add another asset for the date the improvements were completed as placed in service.

If you have several assets on your condo rental here is an example of how to arrive at the selling price and selling expense for each asset.

Use the original cost of each asset listed on depreciation (or the current fair  market value), add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset. (Choices would also be fair market value on the date of the sale or adjusted basis on the date of the sale, which is cost less depreciation.)

Example:  Original Cost (of each asset on your depreciation schedule)

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

It's not clear what the capital contribution paid to the condo association was for.  If it was required as part of the condo purchase you could add it otherwise it was personal expense before the condo became rental property.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Wages & Expenses
2. Scroll to Rental properties and royalties, click Edit/Add or Start/Revisit
3. Do you want to review your rental?, click Yes
4. Under Rent and Royalty Summary, click Edit
5. Click Update to the right of Assets/Depreciation.
6. Do you want to go directly to your asset summary?, click Yes and Continue
7. Click Edit to the right of each asset to be disposed of/sold
8. Go through several screens until you get to Tell Us More About This Rental Asset
9. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

@Tax2019Pay 

The remodels should have been added to the cost of the property when it was placed in service for rental, not just your original cost to purchase the condo. 

• 'The tax law requires depreciation allowed or allowable which simply means use it or lose it.  It must be treated like you did take the required depreciation expense each year.' (from above)

If you did not add them to the original cost when you placed your condo in service for rental, then you will want to do the following:

1. Add the capital improvements as an asset using the original date placed in service for rental with the same recovery period which would be residential rental property (27.5 year). This will show all of the accumulated depreciation for all prior years and the current year.
2. Allocate your selling price and selling expenses accordingly as indicated above for each asset.  It is one condo with more than one asset at this point and it's normal to have a remodel listed as a separate asset.  It's important because of the steps to take advantage of the unused depreciation below.
3. Next, you can use the change in accounting method to deduct all prior depreciation on Schedule E for the remodels you never deducted. A onetime entry for the year of sale if you choose to follow the steps below to make the change.  Otherwise you lose all of the depreciation you never deducted and it becomes taxable gain anyway.

Form 3115 Instruction: By including this with the current year tax return, you can complete everything on the 2022 tax return.

1. Adopt a change in accounting method: This option allows you to go back as far as you need. Make the adjustment on your current year tax return to expense the missing depreciation. (Simply add a miscellaneous expense for this on your rental for 2022.
   • Why am I adopting a change in accounting method? Not claiming depreciation in two or more years indicates that you've chosen an accounting method without depreciation. In this case, you must now elect to change your accounting method to include depreciation.
2. You must use the TurboTax CD/Download version to complete this form. TurboTax does not help you with this form. And your return must be mailed because this form is not supported through e-file. 
   • How do I switch from TurboTax Online to TurboTax CD/Download?

This must be completed and filed with the return on time.  As far as the contribution of $600 it seems like it's a personal expense since it's unclear why the payment was required.

@Tax2019Pay 

Under "Tell Us Abut This Rental Asset", for Cost Base, TurboTax said:" The Cost (or basis) of an asset is generally just the amount you paid for it. However, you can also include amounts spent in acquiring the item, such as freight, installation, sales tax, and legal fees. How to determine the cost of:

Property converted to business use from personal use
If you used the item for personal purposes before you started using it in your business, the cost is the lesser of: The item's fair market value, or Your basis in the asset (how much you've paid for it, including whatever you spent to acquire it) at the time you started using it for business."

Am I understanding the Turbo Tax instruction correctly that I will add the following as cost:

1. Purchase price of the condo

2. Fees that I incurred to purchase the condo such as transfer tax, title fee and other document/legal fees

Can I add improvement done to the property before I started renting to the cost here?

Let's get specific with each question. 

Yes, your amounts below would be included in the cost of the condo assuming the cost is less or equal to FMV.

• Question 1: Am I understanding the Turbo Tax instruction correctly that I will add the following as cost: 
  • 1. Purchase price of the condo 
  • 2. Fees that I incurred to purchase the condo such as transfer tax, title fee and other document/legal fees (If the $600 fee was considered a legal fee you can include it.

It depends.  If you did not add these improvements to the condo cost basis when you originally placed it in service (2016) and did not add them as a separate asset during the rental period you should enter then as a separate asset treated exactly as the condo asset has been treated as explained above. If they were always part of the cost of the condo as part of your rental asset then they should already be accounted for.

• Question 2: Can I add improvement done to the property before I started renting to the cost here?

Here is what is unclear:

1. Did you list your condo as an asset on your tax return for your rental activity on the date you began listing it as a rental in 2016?
2. If so, did you include the remodeling costs at the same time, included with the purchase price or as a separate asset?
3. Do you have any other assets listed for your condo rental?

For your gain to be applied correctly and for you to receive the best tax advantage this needs to be clear. 

@Tax2019Pay 

Depreciation on the 1st year (partial year rental) and depreciation on the last year (property sold) should be prorated based on days used for rental, correct?

That is correct.

Just to repeat the background, I bought the condo as personal property in 2013 and converted it to rental property in 2016. I sold the rental property shortly after the last tenant moved out in early 2022.

Under "Tell Us About This Rental Asset".   For "Date purchased or acquired (mm/dd/yyyy), should I enter the purchase date for the condo in 2013 or the date in 2016 when I started rental?

Under "Tell Us More Abut This Rental Asset", should I check 1 or both of the following boxes?

Box 2: I purchased this asset

Box 3: The item was sold, retired,....

Thanks in advance for your advice.

You should enter the purchase date in 2013.  Then as a follow-up, the program will ask you what date you converted into a rental and that date will be used for depreciation recapture purposes.

Yes, you will check both Boxes 2 & 3.

@Tax2019Pay 

Hi DianeW777 and experts:

When one converts a personal home to a rental home, and used only the purchase price as the cost base for depreciation, and did not include the renovation cost done before the start of the rental, and did not include the cost of purchase (such as legal fees and transfer tax), at the time of rental property sale a few years later, how do you handle these costs which was not included in the depreciation base for the rental property?  Do you ignore to avoid complication and since it is only less tax savings for you?  Do you have to change the accounting rule? Can you claim these costs separately?

My second question is how do you handle any seller credit or real estate broker credit at the time of purchase?  Do you deduct them from the cost base of purchase?  All the real estate taxes were based on the original purchase price and were not based on (purchase price - seller credit - real estate broker credit).

Thanks

All of these costs (closing costs, renovations, etc.) should be added to the depreciable basis of the home.  They increase the cost of the home and so you depreciate them over time.  

You should have added them to your basis when you converted the home to a rental and it would have given you a larger depreciation deduction over the life of the rental as well as reducing your gain when you sold it.  

You can go back up to three years on your tax returns so if you had the rental on your taxes as far back as 2019 then you can go back and amend any tax returns to increase the basis prior to the sale.  (2019 deadline is April 15th, 2023) If it was more than three years ago it is lost to the ether.

@Tax2019Pay