Question regarding rental property taken out of service 12/31/24, but sold 5/15/25. Turbotax is forcing me to do the wrong thing!

[user17756490410]

I turned a primary residence into a rental and sold it less than 3 years later so I get the capital gains exclusion.

I had a lease until 12/31/24.  I decided to sell the house in 2025. I did not hold the house out for rent in 2025 as I needed to sell to avoid cap gains.

Turbotax is telling me I need to claim depreciation for the 5.5 months in 2025, even though it wasn't a rental. It will not let me manually edit this number to zero.

If I say I sold the house on 1/1/25, (which I didn't) it still calculates .5 months of depreciation in 2025.
If I say I took the house out of service on 12/31/24, it gives me an error saying that is an illegal entry.

I am not supposed to claim this depreciation, but Turbotax is forcing me to. Even if I go in the forms, I can't edit the number.

I also have rental fees that weren't paid until 2025. (They delayed billing me for HOA fees and a plumber bill that were both legit rental expenses in 2024, but need to be claimed in 2025.)   So the house needs to appear as if it is still a rental in Turbotax to claim these things.

The tax laws are clear as mud as how to handle this type of situation. There is no guidance, and some of it is contradictory. 

Any ideas how I can claim the legit rental expenses that were paid in 2025?  Any way to not have TurboTax add depreciation for a house that wasn't available to rent?  And what to do about property taxes and mortgage interest?  Does the property become an investment property if it's not up for rent? It can't be a qualified home as I didn't spend any time there those 5.5 months in which I was gettting it ready to sell. (I'm not claiming any of the costs to prepare it to sell as rental expenses. I figure I need to eat those.)

Our tax laws are so confusing and Turbotax guidance is just awful.

[DianeW777]

My advice is as follows. Take the property out of service 01/01/2025, it may calculate depreciation expense for a half of a month. To correct this you can add that same amount as income one the rental to cancel it out.  Next follow the instructions below to report the sale (answer assumes you lived in this rental as your main home for 24 of the last 60 months.

Enter your rental expenses on your Schedule E as usual.

Home Sale with Rental:

In your situation the sale should be reported as a sale of your home. This means that in the rental activity you must be sure to select in Property Info it was sold and when prompted select Special Handling (this stops TurboTax from looking for sale information in the rental).

When you enter the home sale in TurboTax it will ask for a couple of items that are needed to report the sale correctly.  

1. The total depreciation expense that was allowed during the period it was available for rent. Check your prior tax returns for this figure from the rental.
2. The number of days the property was available for rent during the ownership period.

Results:

1. The amount of depreciation that was allowed will be completely taxable up to the amount of gain received on the sale.
2. The remaining gain if any, will be split between taxable and amount eligible for exclusion by using the following formula.
   • The total days available for rent will be divided by the total days owned to determine the portion of the remaining amount of gain that is taxable for the rental period
   • The balance will be eligible for the home sale exclusion
3. TurboTax will do all the calculations based on your entry

Steps to enter the Sale of Home in TurboTax: Wages and Income > Less Common Income > Sale of Home

1. On the screen Primary use of home select 'Yes'
2. Enter the number of days used as a rental (nonqualified use)
3. Continue to Depreciation after May 6, 1997 > Enter the total depreciation for rental and home office in both boxes

This will allow TurboTax to handle the sale with the correct amount of taxable gain and excluded home sale gain. 

[user17756490410]

So I'm a little confused. When you say "Take the property out of service" Should I put that I sold it on 1/1/25 instead of the actual sale date of 5/15/25?

When I get to the special handling, one of the options is if you converted the property to personal use.  Technically, it just sat there, so I don't think I should say I converted it to personal use.

Also, as I go through the special situation questions it asks about Asset Sales Price, Asset Sales Expenses, etc.  I don't see how I get about showing the sale on the Rental Biz section. It won't really let me...

If it is in the rental biz section as a sale of my home, I probably shouldn't include it on the personal side as well.

The software seems broken. I have legit rental expenses tied to that property from 2024 that I didn't get billed for until 2025, so the biz probably needs to remain intact. It was not converted to personal use as it sat there empty all of 2025. It is not a qualified property, so I probably can't claim property taxes or mortgage interest on this home in 2025 as a rental expense.  I'm not sure I can claim the property tax at all as it wasn't a rental or  a qualified personal use.

To do this method, On the personal tab, it's showing the sale date as of 1/1/2025 which doesn't match my closing documents as I sold it on 5/15/25

On the personal side of things, it does, it gets all screwy.  It's asking me if I lived there 24 months out of 60, but if I move the sale date up to the ficticious one, then it isn't true and I can't have that or I lose my giant cap gains exclusion on sale of personal home.

Everything just seems to break now.  I'd love to go in and just manually edit the depreciation on the form to 0 as that would solve my problem but it won't let me.  I can't tell where Turbotax is taking my previous year's loss I couldn't take until I sold my home that carried over. It seems to have now disappeared.

You try to do any kind of hack to get it to work and everything breaks.

[user17756490410]

Also, if I claim income to offset the 2025 depreciation, that seems like a bad idea.  A: I didn't actually claim any income. B: It would offset the depreciation, but I'm not sure how that would affect other things.  If I put the sale as 5/15/25 which is the real sale date, it shows about $4900 of depreciation for 2025.  Since I'm taking $4,900 of depreciation this year, but also claiming that depreciation immediately back on the sale of my house, isn't that a wash?  I deduct $4,900 from my income, but then I claim it back in the sale.  If I claim income of $4900, it would just add extra income for me...

[DianeW777]

Let's start with your first questions. I completely understand your reluctance, however your end results will be correct and that is what matters most.

1. Should I put that I sold it on 1/1/25 instead of the actual sale date of 5/15/25? Yes, the sale will not take place in the rental asset screens.
2. Converted to personal use selection is important - again it will not be sold inside the rental asset section.
3. Special Handling allows you to bypass the questions about sale in the rental asset and it should.
4. As indicated in my first response, Enter your rental expenses on your Schedule E as usual- for all expenses paid in 2025.
   • You indicated the property was not available for rent in 2025 - no mortgage interest or real estate taxes can be used on Schedule E for this reason.
5. The sale date in the home sale should be the actual sales date of 05/15/2025.
6. Use the steps below to enter your passive activity loss carryover or confirm it is in place:
   • You must go into the rental property income section first, then follow the steps to enter your carryover loss.
     • Any passive activity loss (PAL) carryforwards allowed would be listed on your Form 8582, Worksheet 5 or 6, in your 2024 tax return as 'unallowed loss'.  If you have a PAL and it does not seem to be populated in your 2025 tax return you can take the following steps to enter it.
     • Use the magnifying glass to Search (upper right) > Type rentals > Jump to Rentals > Select Edit beside your Rental Activity  > Under Less Common Situations > Review Carryovers, limitations, at risk info, etc. > Continue to enter your passive loss carryover.  See the image below for assistance.
7. No it will not add extra income since you are equaling out the depreciation that should not be used, which is an intentional wash. Your carryover PAL will still be used on your Schedule E and reduce other income as intended in the year of disposition/sale of your rental.

Because you do have expenses and you have your PAL carryforward it's important that you use all of it. If you have more questions please update.

@user17756490410 

[user17756490410]

I really don't feel comfortable lying on so many things.  Turbotax needs to fix this.  If I answer correctly, Turbotax takes $4900 of depreciation for the half year I didn't hold it out as a rental. (Even though it shouldn't.)

But the flip side is that I sold the house in the same year, so I immediately recapture that $4900 I got to write off just a minute earlier.

Wouldn't this be a cleaner way to handle things without using so many entries I know are wrong and would not be able to justify in an audit?

(The ideal solution would just be to override the depreciation for 2025 and put it at 0 for 2025 which is what it SHOULD be, but my understanding is if I use an override I can't e-file and lose some other protections.)

[DianeW777]

Your 'Just Let It Depreciate and Recapture' Alternative -- Your instinct about this being a wash isn't wrong mathematically — if TurboTax takes $4,900 in depreciation and you immediately recapture it in the sale, the net effect should be zero. However, there are two risks:

• Depreciation is deducted at your ordinary income tax rate on Schedule E, but recaptured at the Section 1250 rate (max 25%). If your marginal rate differs from 25%, it's not a perfect wash.
• You're claiming depreciation you weren't entitled to, which is technically incorrect even if the net impact is small.

These are not as easily justified should an audit occur in the future.

@user17756490410 

[user17756490410]

So it sounds like there is no way that TurboTax can do this without making horrible misstatements that wouldn't hold up in an audit.  I'm screwed because the software doesn't work.

I either have to lie and say I held the house out for rent for one day and sold it on that day which I didn't. Or I have to claim depreciation I'm not entitled to and immediately give it back.

The other option which is super easy is to override that field and put a "0" for 2025 depreciation which makes everything nice and clean, but my understanding is TurboTax will get extremely mad at me and won't let me e-file or offer any protections with my taxes.

I'm screwed because this software sucks and makes you lie about your taxes...

Your solution also has me claiming depreciation I'm not entitled to, does it not?  You are just saying I should offset it with fake revenue that didn't happen AND recapture it?  That doesn't make sense.

Surely there is a way to answer the turbo tax questions or fill out the forms that doesn't involve me needing to claim depreciation I'm not allowed or claiming income that never happened.  Is there another TurboTax expert who might have an idea.  I feel like I bought buggy software and it doesn't work.

[user17756490410]

Also, I can't seem to follow along with your instructions. In the property info, there is a prompt to select special handling, but when I click yes, (one of the options is "did I convert to personal use",  it just tells me the depreciation amount is either $516 or $4645 depending on if I put the fake date of sale (1/1/25) or the real date of sale (5/15/25).

Also, If I select I converted it to personal use, things get all jacked up.  The Special Handling Required page just has a bunch of options listed, but you can't select them individually. You can only click, YES special handling required at which point it just tell me the depreciation deduction. No questions about converting to a personal property.

On the Property Profile section, I can say I turned it to 100% personal use but if I leave the date of disposal blank, it gives me depreciation for the entire year.

If I put the disposition date as 1/1/25, then I still get $516 of depreciation. 

BUT, there is a pop up that states I need to have 15 days of rented at a fair market price or I can't claim expenses.  So again, it's asking me to lie to claim expenses I'm entitled to. I just put 1 day of fair rental. The software is buggy, the popup was an orange box, and I can't get it to reappear.

Here is where I'm confused.

I guess what I don't understand is what do you mean it will not be sold under the  rental section? It won't let me NOT sell it there.  I don't see how to answer the questions honestly where it isn't disposed of in the rental section.  There is nowhere to claim you converted it to personal use, that's just one of the questions on on the special handling page.

On the profile, I could say I didn't sell it but that doesn't seem right.  If I click I converted this rental property to personal use in 2025, nothing really happens. It just shows me depreciation still.

So frustrating. 

[DianeW777]

The software can handle your situation and hundreds of others which does require special processes depending on circumstances. It's normal and expected due to the various ways many scenarios need to be handled.

You can try entering zero days rented to get rid of the depreciation all together.

@user17756490410 

[user17756490410]

Entering zero days rented does not get rid of the depreciation all together.

Turbotax needs to dramatically improve the language they use on many of these questions.  It boggles my mind they haven't correct so many issues with this program or provided better tool tips.

As it is, there is no way to correctly report my home sale without entering misinformation to questions and purposely answering questions the wrong way.  The software is awful when it comes to figuring out a rental that was converted to be for sale at the end of a fiscal year.