Contrary to what others may say, there is no "extension" for military in any way, shape form or fashion. It's a "suspension" of the day count. Therefore, to say you can't report the sale in the SCH E section is not entirely correct. If the property was still classified as a rental when you sold it, then you most certainly can report it in the SCH E section. Basically, and in simpler form, the rule says the property must have been your primary residence for at least 2 years (730 days) of the last 5 years (1826 days) you owned it. Furthermore, for military the day count stops, meaning that the day count is suspended (not extended), on the day you depart the area under military PCS orders. Nothing is extended. The day count resumes on the day you are back in the area - again under PCS orders. The day count also resumes on the day of separation under separation orders regardless of where you may be on the separation date. (There are other factors that can over-ride the day count resumption upon separation date, which I'm not discussing here.)
Say you moved out and departed the area under orders on June 1, 2013 after having lived in the house for 730 days or more and converted it to a rental. Then in 2019 you sold the property and it was still classified as a rental and you were still under PCS orders keeping the day count suspension in force. When asked if you lived in the property for 2 of the last 5 years you owned it, then the answer is yes. Your day count stopped on Jun 1, 2010 and never resumed prior to the closing date of the sale.
While you most certainly can report the sale in the "Sale of Home (Gain or Loss)" section, if you report it in the SCH E section (assuming it's still classified as a rental at the time of the sale) then the program (not you) will figure all the depreciation recapture and other deductible rental expenses for that year of sale, "for you".
Now, if you vacated the tenant prior to the sale with no intention of renting it out again prior to the sale, then yes, you definitely need to convert the property to personal use effective one day after the last renter moved out. When you do that, several things happen.
- Depreciation stops on the date of conversion to personal use.
- Any and all expenses incurred after converting the property to personal use are just flat out not deductible on SCH E. Period. This includes a prorated portion of property taxes, mortgage interest and property insurance. A prorated amount of those three will be a SCH A itemized deduction.
This is one reason I suggest that when selling a rental property that is empty, it should be advertised as for sale "or" rent. That way, you can keep the property classified as a rental. Of course, there's always the chance that someone will rent it instead of buying it. But if you make the rent high enough without going overboard ridiculous, that can reduce the chances of that happening.
1.
Under "business Income and Expenses" > Property Profile, I check "I sold or disposed of this property in 2021". (I also have "passive activity real estate losses carried over from a prior year" so would keep that checked).
TTax carries forward the passive losses from prior years so just double check that looks right and keep going.
I assume you have manually checked each and every year that the carry overs are "in fact" carried over. I've seen situations where it hasn't been, and it's always been because of either a user error, or user misunderstanding of the tax laws on the "maximum 25K losses deductible from ordinary income" in many cases.
2.
"Was this property rental for all of 2021" -- No, 240 days in my case because it was sold August 2021 (count the days rented).
Ownership, Actively Particpated questions, etc...answer as you normally would.
I've not taken the time to look, but read the small print on that page. If there was a renter in the property on the closing date, then I think you would indicate it was rented "the whole year" anyway. The program will account for and adjust the numbers accordingly, based on your closing date of the sale. Again, check the small print on that page, as my memory may be rusty.
3.
Under "business Income and Expenses" > "Sale of Property/Depreciation".
Go to Asset summary.
I have several items, but for example, flooring, pavers, kitche remodel expenses, etc.
Each one go in to "Edit". Click Yes for "Did you sotp using this asset in 2021". Put Date of Sale or Disposition as date you sold the rental property (Aug 2021 in my case).
Yes, that would be the closing date of the sale.
For each asset is asks "Was this asset included in the sale of your main home?"
-->Confusing to me as it was our main home 8-10 years ago, but has since been a rental, but I assume I should answer Yes.
You answer yes, since you qualify for the "lived in 2 of last 5" exception. If you answer no, then the gain will not be excluded for taxation.
"Was the rental portion a separate dwelling unit from the home you lived in?" For a duplex/triplex situation this would be a Yes, but this is a single family home in my case.
Answer that yes. I'm wondering if you indicated the property was a multi-family home of any type, as I don't recall seeing that question for a single family dwelling. But your response would be yes anyway.
4.
Under "Business Income and Expenses" > "Sales Information".
Make sure you divvy up the home structure value vs the land value of the property correctly (as you would've done prior years). I've been told you can base this off how your county property tax bill divides it up as one approach.
In my opinion (and we all know what opinions are like) you should base your sales price split between land and structure, on how you allocated between the land and structure cost basis originally. Forget the tax bill. If the property cost basis was $100,000 and you allocated 30% of that to the land, then you should allocate 30% of your sales price to the land. it doesn't have to be exact, because if you have other assets being depreciated, then you allocate some of your structure sales price to the other deprecable assets. Since land is not depreciated, you do not allocated any of your land sales price to depreciable assets. You only allocate your structure sales price.
Under "Time you lived in your home" in this section, the description does refer to the non-active-duty-military exempton with the 24 month tax advantage cut-off. However "Learn More" > "exceptions" does discuss the military exemption.
The word "exemption" is referring to taxable gain. Not time. Remember, the day count is "suspended", not exempted. So you don't count the days of suspension for any day count, at all.
This TTax screen says "Did [you] live the home you sold for at least two years since August 2016?" Even though this is just the standard 5 year look back, I guess I should answer Yes, as the active-duty exemption applies, correct ??
Correct, you will answer that question yes. My guess is that the reason this doesn't raise flags at the IRS, is because you are reporting a military W-2 issued by DFAS. But that's just a guess. In only one instance a few years back did I hear of a military member getting questioned on this by the IRS. It was just a simple matter of them sending a copy of the PCS orders that covered the entire time of the suspended day count, and that was that basically.
5.
Under "Business Income and Expenses" > "Did you use this home for anything other than your primary home?", "...was there any time you used your home for reasons other than as your primary home?" "If you used your home for reasons other than your primary residence after it was no longer your primary home, select "No".
Super confusing! I would think Yes, since it was rented out several years.
If I recall correctly, (and I may not) there's what could be construed as a "double negative" in the IRS pub. For example, "I don't have no pencil". If you don't have no pencil, then that means you gotta have one. So answer the question no.
However, the military exemption is mentioned under "What kinds of reasons does this include?" where they talk about nonqualified use, so that makes me think i should click No, since I was on active-duty throughout.
Select no. Non-qualified use only comes into play if you the property owner was the last occupant to move out of the house prior to the sale. What was happening before, is that folks who owned multiple rentals would rent out a property for say 10 years, then move back into it for two years prior to selling it so they could get the full exemption. It was a loophole of sorts. For a better understanding of how congress "fixed" this, read https://www.merriman.com/wealth-preservation/planning-on-moving-back-into-your-rental-in-the-future-...
6.
Under "Business Income and Expenses" > "Your Property assets".
Here I have several improvement expenses made over time.
First example is a minor kitchen remodel which cost $2355.
""Did you stop using this asset in 2021?" Yes, because I sold the property, right? Enter date of sale (same as entire property).
Correct. Remember, you will allocate some of your structure sales price to this asset. Also keep in mind that since you sold the property at a gain, you must show a gain on each and every asset. Doesn't matter if that gain is only $1 on some assets, and $10,000 on other assets. A gain is a gain, is a gain, is a gain... This is the only way the program can "correctly" recapture and tax the depreciation on that asset. (You will pay tax on recaptured depreciation *no* *matter* *what*.) If you don't show a gain on an asset, then the recaptured depreciation is included in the capital gain and (in your case) not taxed. That will most likely raise flags.
"Special Handling Required"...not sure about this one.
Read the small print. Basically, if you select yes for Special Handling Required, then you are indicating that you disposed of the property in another way besides selling it. I.e.; you gave it away, donated it, lost it, damaged beyond use, burned to the ground, etc. So if you select yes, you will not be asked for sales information. Therefore in your case, you must select no.
"The business use percentage of this asset varied during the years you owend the asset" might apply for some, but we lived in the house before any of these improvements / "Property Assets" were added, so I assume we can say "No"...it was 100% business use.
Correct, from the day you converted it to a rental, and the entire time it was classified as a rental, it was one hundred percent business use. What you used it for before converting it to a rental, or after converting it back to personal use, does not count for anything.
"Was this asset included in the sale of your main home?" Yes.
Correct.
"Was the rental portion a separate dwelling unit from the home you lived in? Not in my case as it's a single family home.
The correct answer is YES. The property was a physically separate unit from the property you lived in as your primary residence, after you converted it to a rental.
"We previously reported the sale of this home on the Home Sale Worksheet for your home sold at {Property name/address]...is this correct? Yes.
This indicates to me (and I could be wrong) that you reported this sale in the "Sale of home (Gain or Loss)" section or the "Sale of Business Property" section. You only report the sale *ONE TIME* and in ONE PLACE on your tax return. While you can report it in a place other than the SCH E section of the program, you'll have to manually figure the depreciation recapture yourself and hope you don't mess up. Whereas if you report the sale in the SCH E section, the program takes care of all that math "for you".
Sales Information: "Enter the following information for your home sale...allocate sales price and any expense of sale between the asset and land based on their fair market values"
This is very confusing, as it's asked again for each and every improvement / "Property asset". I was plugging in the actual home sale info, but that can't be right because it kept adding them together (= $100's of k's of gain way beyond what the gain on the entire property was).
What do you mean "Asking again"??? This further makes me think you've already reported the sale of this property elsewhere in the program.
It must mean each individual Property asset sales price. So, if in my case the home structure is 5/8's of the entire property value, and the land is 3/8's of the entire property value, then I suppose you'd take 5/8's of the cost basis of this kitchen remodel....so $2355 x .625 = $1471.88. Is that right???
You can do all that math if you want. But it's really not necessary. Since you sold at a gain, simply subtract the cost basis of that asset plus $1 from your structure sales price, and that can be the sale price of that asset. Just make sure your structure sales price after sales expenses, is still higher than the structure cost basis, and you'll be fine.
Now some prefer to report the sale in Sale of Home or Sale of Business property, because some find it easier to just do the math manually themselves for the depreciation recapture, and that's perfectly fine so long as you don't mess up that depreciation taken/recaptured amount. If you've already done that, then you will **NOT** report the sale in the SCH E section. Simply work through all the assets again, and on the "Special Handling Required?" screen for each and every asset, select yes, and make the disposition date the same as the closing date you used where ever you reported the sale of this property at already.
