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

[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?

[DianeW777]

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 

[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?

[AbrahamT]

That is correct.

[Tax2019Pay]

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.

[DaveF1006]

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 

[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

[RobertB4444]

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 

[Tax2019Pay]

Hi,

I went back to check tax filing in 2016.  Luckily I did include the cost of condo purchase such as transfer tax, legal fees, and also major renovation cost - this resulted in an adjusted cost base. Turbo Tax then compared the adjusted cost base and fair market value of the rental property and Turbo Tax decided to use the lower of the two values - the  fair market value as the cost base for depreciation.  This was done automatically by TurboTax.  Is this the right way to do depreciation for rental property?  

My second question is: taking into the consideration the above, when I sell the rental property, do I use the fair market value (which was the purchase price) as the cost base or do I now add the transfer tax, legal fees and renovation cost back to the base?

My final question is: in the year when the rental property is sold, am I allowed to depreciate?  if so, do I depreciate the whole year or part year only?

Thanks

[RobertB4444]

That is the correct way to depreciate your rental property.  If you entered the adjusted cost basis when you created the property TurboTax will automatically add that in when you sell the property.

If you used a different preparer for the original return then you sell it add the difference back in for the adjusted cost basis.

In the year you sell you will put in the date of the sale and TurboTax will automatically compute and include the part-year depreciation up to the date of sale.

@Tax2019Pay 

[Tax2019Pay]

what is the typical starting date of rental when you convert it from personal home to rental?  or should it be when the tenant moved in?

[AbrahamT]

It is from the day the tenant moved in.

[Tax2019Pay]

Thanks. I saw on this board that some suggested using when you put your property on the market as the starting date of depreciation.  Both make sense but I just want to be sure.