Asset & Land Sales Price & Expenses for rental that was sold

[fkhalilz]

Hello,

I have searched for any keywords to read prior questions, but I'm still clueless!

I have sold a rental in 2021 after several years of renting it. I am at below TT screen:

Q1. I have a 1099-S where I have the total gross proceeds from the sale listed. I also have added up all sales expenses (i.e. closing cost) from the HUD document. That should answer the 1st and 2nd box above. Is that correct?

Q2. How do I calculated the 3rd box (Land Sale Price)? I do have the initial purchase price and land value from a few years back when I purchased the rental. I also have the most recent property tax assessment for 2021. Do I use these to find land value? If so, which one?

Q3. And finally, how do I calculate the 4th box (Land Sale Expense)?

Thanks!

[LeonardS]

You do not have to calculate separate values for Box 3 and Box 4.

The 1099-S list the total gross proceeds including the land and your HUD document summary accounts for all the expenses of the sale.  Leaving these boxes empty will not impact your tax return.

[fkhalilz]

Thank you very much for your response.

So just to make sure I understood. I can put the total proceeds (1099-S reported amount) in Box #1. And for Box #2, I can put the total closing cost, leaving Box #3 and #4 blank. Is this the correct understanding?

If so, why is this TT screen even prompting me to fill in Box #3 and #4?

Thank you!

[LeonardS]

Yes, that is correct 1099-S in Box 1 and total closing cost in Box 2.  Turbotax asks these questions to be inclusive of all possible situations that a taxpayer may encounter when preparing your tax return. In your return  Box #3 and Box #4 are not required.

[fkhalilz]

Hello,

The Federal Tax Review is showing errors for not entering the Land Sale price. Here is the TT error I'm talking about:

So if this entry is not required (based on what you said earlier), why is TT presenting me with an error? How do I resolve this error?

Thank you!

[JamesG1]

You may report $0 or you may allocate the sales price and the selling costs across both the land and the improvements on the land.

The cost of land and the cost of improvements on the land may be allocated. You may need to refer to local property tax records, the original purchase documents or the documents of sale.

For instance, your local property tax statement may report that the value of the land for the property is $5,000 and the value of the structure is $45,000.  If you sold the property for $200,000, the value of the land could be allocated as:

Land           $  5,000                 

Structure    $45,000

Total           $50,000

Land assumed to be 5,000/50,000 = 10%

10% X sales price of $200,000 = $20,000 allocated to cost of land. 

A similar allocation can be made for the selling expenses.

[fkhalilz]

Thank you for your response. The calculation method you presented makes perfect sense. I have 2 follow up questions:

Q1. If I allocate the sales price between land and structure in the way you explained, how will it affect my taxes (other than clearing the error)?

Q2. I'm still not 100% clear about why the initial response from TT experts was to leave these boxes blank. Are there particular situations under which sales price must be allocated between land and structure portions? Did the tax laws change? Is there a bug in the TT software? or was the initial recommendation simply incorrect? Just want to make sure I understand the reason for the change.

Thank you for your help!

[DianeW777]

The selling price should be allocated between assets when a property is sold. You can enter a zero for assets that may not have any significant selling price such as an appliance that is on your depreciation schedule that has no real value at the time of sale.

• Allocation of consideration paid for a business. The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset.

The gain from the land will be handled slightly differently than the sale of the building and improvements, if applicable. The building and improvements sale with a gain could be taxed at a maximum of 25% if your ordinary tax rate is higher.  Land could have capital gains tax rates because it is not a depreciable asset (if owned more than one year). This means that any gain from the land portion of the sale could be taxed at a lower rate (maximum rate of 20%) if your ordinary income tax is higher.

Any other asset, such as an appliance, as example, if a selling price is considered and appropriate in your case, is not real property (land, buildings and structural components).  Any gain from this asset would be taxed at your ordinary tax rate to the extent of any depreciation claimed in the past.

• IRS Publication 544

[fkhalilz]

@DianeW777 

Thank you for the information. This kind of answers my first question. It seems quite likely that allocating the selling price between land and structure may indeed impact the amount of taxes I owe. This brings me to my second question which is still not answered. If the selling price allocation must be entered into TT, then why was it recommended by @LeonardS to leave those boxes blank or enter zero? Just want to make sure I fully understand this.

Thank you!

[DaveF1006]

It depends. I have prepared returns in the past where clients  did not know their allocation between land and building basis and had no discernable records such as a property tax bill.  As a result, we allocated the entire selling price entirely toward the building.

The downside to this is that, when selling a rental, depreciation is recaptured, which results in less basis and more taxable gain.  If you have a document such a a property tax bill that separates a different assessed values for land and building, one can take a ratio between land assessment /total assessment and building assessment/total assessment.  This way you can report the correct basis for the land and correct basis for the building by using the same ratios.

By having separate values for land and building, this will result in a leaser amount for depreciation recapture for the building and more of a tax savings to you.

@fkhalilz

[fkhalilz]

@LeonardS 

This question is for @LeonardS. Do you have anything to add here? Just want to make sure I hear your side as well. What is your rational for suggesting to leave those 2 boxes blank?

Thanks!

[LeonardS]

I would add that if you have any assessors records at the time of your purchase you may use the ratio of land value to overall value to determine a percentage value for the land and apply this percentage to the gross sale amount to determine the land sale amount.

[gjgogol]

Q1: where on Form 4797 does land get reported on ) Part I or Part III)?

Q2: where on Form 4797 does the amortization of refinance fees get reported on?

Q3: since sale of rental is reported on 1099S as a lump sum of all assets, can I treat the sale also as a lump sum on Form 4797 (vice breaking down sale among all depreciable assets)?

[MarilynG1]

How do you have your Assets set up in the Rental section?   If you have them each set up individually as House, Land, Refinance Fees, then you need to 'sell' each of them and report a Sales Price for each of them.

If you only have the Rental house as an asset, you could apply the entire sales price it.

It's better to do this in the Rental section interview, rather than making entries directly on Form 4797 in Part I, item 2, where all items related to business are listed. 

Click this link for info on How to Report Sale of Rental Property.  

@gjgogol

[Carl]

Q1. I have a 1099-S where I have the total gross proceeds from the sale listed. I also have added up all sales expenses (i.e. closing cost) from the HUD document. That should answer the 1st and 2nd box above. Is that correct?

For starters, disregard the 1099-S. That form only shows you the cash you were paid at the closing, and nothing more. Most likely, the amount does not include what was used from the sale proceeds to pay off the existing mortgage, property taxes, and other monetary obligations.  You get your numbers from the HUD-1 statement you received at the closing.

Q2. How do I calculated the 3rd box (Land Sale Price)? I do have the initial purchase price and land value from a few years back when I purchased the rental. I also have the most recent property tax assessment for 2021. Do I use these to find land value? If so, which one?

Do the math to figure what percentage of your original purchase price was allocated to the land value when you initially purchased the property. Then use that same percentage to allocate a portion of your sales price to the land. Once you've allocated an appropriate amount to the land, the remaining amount has to be allocated among the structure and any other depreciable assets you may have listed in the Sale Of Assets/Depreciation section.

Q3. And finally, how do I calculate the 4th box (Land Sale Expense)?

Same percentage you used to figure Q2 above.