4797 or 8949 sale of property at a LOSS

[cc063854]

I was not a real estate professional or participated in rental business. I only had a residential property which I lived in over 2 years and then rented out for 3 years. When I sold my rental property, I made a $100K loss after cost adjustment and depreciation recapture. Should I report this loss in form 4797 or 8949? Also is this loss 100% deductible on the tax return or it's only deductible $3000 a year and carryover the loss? Thanks!

[DianeW777]

It depends. If your property was an active rental when it was sold the full loss will be allowed. You would report the sale in your rental activity selecting each asset indicating "This asset was sold, retired, traded, etc.....'. Once this is completed you would enter the sales price and sales expenses for each asset.

If the property was not being rented when it was sold, no rental activity on your tax return AND it was not being used as a personal residence you can report it as a sale of business property.  Be prepared with the depreciation and sales price, sales expenses, date acquired and date of sale. Following the steps outlined will allow TurboTax to carry the loss appropriately.

1. Income & Expenses at the top
2. Scroll down to Other Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter your sales information, do not make an entry for depreciation (no zeros)
   1.  Description of the Property (Second Home/Previous Rental Home)
   2. Sales Price/Sales Expenses 
   3. Date acquired and date sold
   4. Cost
   5. Depreciation

If at any time you converted it back to personal use as a residence, then the loss would not be allowed.  If it remained a rental property after your moved out, then the loss will be allowed against other income.

[cc063854]

Thanks for answering my question quick! I sold it at the beginning of the year 2024 and at that time. I stopped renting out at the end of 2023 and didn't live there since September 2023.
How do I know if this is active rental? I had been reporting my rental income on Schedule E.

My biggest concern is that if I report on form 4797 i get a big refund of $30K since I can deduct all loss.

[DianeW777]

It seems like you did  move back into the rental property as your main residence. In that situation, you may be able to see if you meet the sale of home exclusion rules. Keep in mind you will still need your total depreciation used while it was a rental and you will not have a total exclusion. Instead report the sale using the instructions below with or without a 1099-S.

In Property Info be sure to indicate it was sold and when prompted select Special Handling (this stops TurboTax from looking for sale information in the rental).

If you qualify for the home sale exclusion follow the steps below. See qualifications below.

• Where do I enter my Form 1099-S?

The rules of capital gain exclusion for the sale of your main home must occur within five years in your situation. It's necessary to show the time that it was your main home.  Below is a summary of the requirements for exclusion of gain on your main home sale.

Exclusion amount: If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.

Key Eligibility Requirements: IRS Publication 523

1. Ownership: If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
2. Use: If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
3. Look Back Period: If you didn't sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn't take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.
4. Exceptions - May not apply to you and can be reviewed at the link above.

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.
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