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Investment property and capital gains

Hello, first excuse any grammar or typos! 🙂

 

I am looking for some help related to capital gains on a rental property I own.  I have talked it a few CPAs to include mine and the answers I get are not the exact same. I have also read online to include the IRS website and I am still a little unsure.

 

I bought a home around 02/03/2014 for 170k.  I started to rent it out 12/26/2016.  So I live in it for almost 2 years and 10 months before I started to rent it.

 

I heard many things and the one thing I believe is true is that for capital gains I would pay on profit I made would be the difference one how much I sold it for say 270k minus the value of it when it became a rental.  Is that correct?

 

My follow up question:  Where do you get the value of the house when it was converted into a rental to do this math?

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2 Replies
HelenC12
Expert Alumni

Investment property and capital gains

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. To figure your basis for depreciation, you could research it online or contact a realtor to get comparable home values on or around 12/26/2016. This will provide documentation for your rental home's basis for depreciation.

 

 

No, your gain on the sale of your rental home calculation is not correct. 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. 

 

NoteUpon sale, you may have to pay 25% on your depreciation recapture.

  • When you sell a rental, in addition to capital gains, you may have Depreciation Recapture. If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. 
  • See IRS Publication 544 Chapter 3 Depreciation Recapture :

 

 

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Carl
Level 15

Investment property and capital gains

Where do you get the value of the house when it was converted into a rental to do this math?

You do not need that value. Your cost basis at the time of conversion is the "lower" of what you paid for it when you originally purchased it in 2014 , or it's fair market value when you converted it to rental in 2016. I have no doubt that what you paid for it in 2014 is lower than what it was worth when you converted it to a rental in 2016. So you can report the sale in the rental section of the program.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2020". Select it. After you select the "I sold or otherwise disposed of this property in 2020" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2020" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

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