In 2017 we converted our residence to a rental. We bought it in 2006 and the value has never recovered from the 2007/8 crash. How do I enter the cost basis?

[rob-lettman]

The questions asked by the software allow me to specify that we converted a residence to a rental. but nowhere do I encounter a place to enter the Fair Market Value to establish the basis. It only lets me fill in the date of the purchase and the original cost. This would overstate the depreciation basis by quite a bit.

[TaxGuyBill]

If it ONLY asks for the cost, then enter the Fair Market Value there (assuming the FMV is less than the Basis).

Whenever you sell the property, TurboTax is not set up well (or at all) for that situation, so you may consider a tax professional whenever you sell the property.

[rob-lettman]

I am an accountant, so I'm not inclined to pay a "tax professional" to do my taxes. I am extremely disheartened to hear that TurboTax is not set up to handle this correctly. We also sold a rental property in 2017. So I guess I'm going to end up having to do the entire return on paper.

[Coleen3]

When you converted the property from personal use to rental, the basis for depreciation was lower of the Adjusted Basis or the FMV on the date of conversion.

Now that you are selling, it gets a little trickier.

Calculating Gain/Loss on Subsequent Sale of Rental Property

If a residence converted to rental property is later sold at a gain, the basis in the converted property is the original cost or other basis plus amounts paid for capital improvements, less any depreciation taken.

 If the sale results in a loss, however, the starting point for basis is the lower of the property’s adjusted cost basis or FMV when it was converted from personal to rental property (Regs. Sec. 1.165-9(b)(2)). This rule is designed to ensure that any decline in value occurring while the property was held as a personal residence does not later become deductible on the sale of the rental property

[rob-lettman]

Our plan is to sell the property within three years of when we converted it to a rental. Since we will have lived in it for two of the last five years at that point we will take the capital gains exclusion. My problem is that TurboTax does not give me the option of entering the lower FMV. It only asks me for the Purchase price and the date that we purchased the property - which was more than ten years ago. The software is also very unclear about entering the expenses. I entered the entire amount of the mortgage interest and the insurance because the software claimed it was going to allocate between the time that the property was a rental and the time that we occupied it. Instead, it put the entire amounts as an operating expense. This is the first year where I have had problems using Turbo Tax. It looks like I will have to find a better product.