Please help me sort out sale of a rental property issues

[karenkailua]

I bought a rental property in 1992 for 158K. 

I married in 1996 and added his name to the deed, so he became 50% owner.

We divorced in 2010 but the property was not part of the settlement — we continued to co-own it, as tenants in common, and split the income and expenses 50/50. 

I bought him out in 2017 for $155K (half of the appraised FMV of 310k.) 

I sold the property in 2024 for 475K, and costs of sale were 45K.

1. What is my cost basis?  I’ve read that it’s my original purchase price of 158 + buyout amount of 155. Also I’ve read that it’s my 50% of the original purchase price + buyout amount of 155 + amount of mortgage I assumed. (Actually I had to take out a new mortgage (“refi?”), in my name only, for 170K)

2.  How do I enter the sale info in TT Premier (download version)? Under Income, Rental properties, Rental Summary, Sale of property/Depreciation, Assets, I have an asset entry for the original purchase and another one for the buyout. Also, after the divorce I adjusted the depreciation report to reflect only my 50% ownership. I don’t know if how I did this was correct, and now that I'm trying to input data for the sale, I don’t know if I need to split the sale amount and put half against each of the assets (the original purchase and the buyout). I'm concerned that would not match the 1099-S. Or can I somehow combine the two assets? Can I simply delete the two entries and put all the info into one entry? I’m not sure I should edit the depreciation info that was brought forward from my 2023 return. I sure don't want to trigger an inquiry from IRS if my info looks suspicious.

I appreciate any help!

[DianeW777]

Here is the bottom line for your answers and how to proceed with the sale of your rental property.

1. The cost basis for you is half the original cost plus the additional amount you used to buy out your former spouse, plus expenses of the purchase at that time.
   • You gave half of the property to your former spouse when you added his name to the deed.
2. You are entering it in the correct location. It must be sold in the asset section of your rental activity. You have the correct information in the assets because his actual cost basis would have been your cost basis on the date of the gift.  In other words your cost, depreciation, etc is correct with your adjustments after the gift. It is not necessary to delete anything or combine anything.
   • You must allocate the sales price to each asset - use the example below to arrive at the sales price and sales expenses for each asset.
   • Example of arriving at the selling price and sales expenses for each asset in your rental activity.

• 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.

Do not say 'Yes' to Special Handling for these assets.  TurboTax will carry the gain to the appropriate location on the tax return.

[karenkailua]

Thank you for this explanation.

I need to ask for a clarification about allocating the sales price to each asset.

I understand that the 2024 sales price needs to be apportioned to the two assets: the original purchase and the buyout/gift. For example, if the original purchase asset was 75K and the buyout was 150K, then a sale price of 300K would be allocated as 100K and 200K respectively. Is that correct?

Then, in your example you show how to allocate the sales price and expenses by land, house, improvements. But the TT Sales Information screen asks only for asset (meaning the house) sales price, asset sales expenses, land sales price and land sales expenses. Do I lump improvements and costs of sales together as expenses?

Appreciate the help!

[DianeW777]

Your cost is calculated as follows based on your numbers in your first question.

• Original cost after gift given to X  - $158,000 x 50% = $79,000 (each has the same cost basis w/o considering depreciation)
• Buy out - $155,000 + $79,000 = $234,000 = Total cost basis before any depreciation and should be used to calculate sales price for building, land and any other assets.

You would allocate the sales price to any improvements that have been added as a separate asset in your rental activity, then apply that sales price and sales expense to the improvements just like you do for the house and the land. If you do not have any capital improvements as an asset, then you would use only the assets you have in your rental activity.

[karenkailua]

Ok, thank you so much! I'm all set.