Confused about rental property sale

[Peggytas]

I know it's my fault.  I added the property again as asset and then the links opened up.  Your instructions are thorough.  I believe I got this done.  

[Olaves76633]

Regarding the sale of a rental property, you indicate that you are allocating only the structure value portion over all the assets, so how and where do you enter the land value?  The value of the land has increased during the time that we have used the property as a rental property.  The land does not fall under a depreciated asset but I am certain that the IRS wants their cut.

[DianeW777]

You are correct.  The land is not a depreciable asset, however you must allocate part of the selling price to the land as well as the building and other assets that would have been sold that are part of the sale and listed as depreciable assets on your tax return.  The complete sale must be reported.

Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

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.

I hope this example provides clarification to enter your sale.

[Olaves76633]

No, it doesn't help.  I already understood that part and have done that.  What I don't understand is where I report the land portion since this section for sale of business properties seems to address only depreciated assets.  Are you saying (or not saying really) that I will report it in the same area, just showing no depreciation?  I.e., act like it is a depreciated item but show no depreciation?  

Now I also have a second problem.  I am using Premier and the Enterable 4797 won't allow me enough pages to enter all the assets.  We sold 3 properties (all that we own) this year but have owned them for a good while so our list of assets is at minimum 6 plus the land and at maximum 9 plus the land.  The program only allows me a total of 5 pages of 4 assets each.  What can I do to solve this?  

[Carl]

where I report the land portion since this section for sale of business properties seems to address only depreciated assets.

Actually, the Sale of Assets/Depreciation section does include your land. If you'll edit the item that deals with the property itself, you'll see that you have "COST" which includes the land, and then "COST OF LAND". For depreciation purposes, the way it works is that the program subtracts the cost of land from the cost, and the difference is the value of the structure. It's that difference that gets depreciated.

When reporting the sale, you're reporting the entire sale price of that asset. That sale price includes the land. It does not change the amount of depreciation recapture (as it shouldn't) on that asset.

It all works out in the wash, if you just follow the prompts on each screen and let the program "do it's thing" in the background.

[Olaves76633]

Maybe I am not conveying my message properly.  I am trying to figure out where I would put the value of the land on the date that I sold the property.  Many years ago, I had already put the value of the land in for the purposes of only depreciating the structure.  Now I have sold the property.  The value of the land in now different.  

I do not find any option to input the current cost of the at its current value.  "Cost of land" does not show up in the section under sale of business or rental property (Business Items Section).  It only shows up when I am dealing with the depreciation section for the partial year of rental income (Rental Properties and Royalties).  That amount is the ORIGINAL amount of the land value when I changed it from residence to a rental property.  Directions indicate not to change that amount unless my percentage of use drops (which it did not for the portion of the year that the property was rented).  

So, I still have not resolved the issue.  The current value of the land is higher so I would have a capital gain but I find no way to report that in Turbotax Premier for 2021 taxes.

Also, how do I address the issue of there not being enough capacity to deal with all the assets since it is limited to 20 items (5 pages of 4) and I have more than that.  The assets, for the most part, have different acquisition/in service dates so combining all the improvements into a single item does not make sense. 

[Carl]

Now I have sold the property. The value of the land in now different.

How so? If you paid/allocated $5000 to the land portion when you purchased the property in say, 2005, that never changes. No exceptions. Selling the property in 2021 does not change the fact that you paid $5000 for it, in 2005.

Or are you talking about the sale price? The program does ask you to enter the structure sales price and the land sales price in separate boxes. The "value" has nothing to do with this. Only the actual purchase price and the actual sales price.

[Olaves76633]

I agree that what I paid never changes and thus the reason not to change that number in the rental section.  I totally understand that. 

Applying that percentage (13.33%) to the sales price that you arrived at based on the original price (when the property was purchased) and if you sell the property now at $150,000 after using it as a rental for several years, your land value at 13.33% x $150,000 would now be $20,000 (based on the sales price) because the price is now double what you paid for it.    So where, if anywhere, is the $20,000 reflected?  Or how does Turbotax know that is the value of the land resulting in a $10,000 capital gain on the land?   

"Use the original cost of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset.

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%

[DianeW777]

As indicated by @Carl, there is a place to enter the sales price for the structure and the land in the rental asset section.  Please review the images below that you will see as you go through the asset entry and sales information.  You can see how they are both being handled together in the asset entry.  Be sure to indicate the rental is sold and the rest will come automatically.

You need to dispose of the property by telling TurboTax how and when it was disposed of.  Follow the instructions below.

1. Click on Income & Expenses
2. Under Your income and expenses, scroll down to
3. Rental properties and royalties, click Edit/Add
4. Do you want to review your rental?, click Yes
5. Under Rent and Royalty Summary, click Edit
6. Click Update to the right of Assets/Depreciation.
7. Do you want to go directly to your asset summary?, click Yes and Continue
8. Click Edit to the right of each asset to be disposed
9. Go through several screens until you get to Tell Us More About This Rental Asset
10. Click on This item was sold…….   And continue to answer the questions

You might also review information here.

[Olaves76633]

Well, here is the problem.  

Once I get to Step 8, it asks me to review information transferred from my 2020 return.  Then the next step asks if I stopped using it for business purposes in 2021.  Sold is one of the possibilities listed so I answer "Yes", 

That takes me to the next page and the only two questions on that page are:  Date of Sale or Disposition and Date Acquired. 

When I continue, it asks whether special handling is required and one of the options was whether it was a rental so I answered "Yes".  Apparently that was wrong because when I changed it to "No", the screens you reference are now showing up and allows me to put in the land price.  I thought it was indicating that I needed to answer "yes" if this was a rental property and it was.  Apparently, it meant whether or not the asset was being rented.  

[Carl]

Sold is one of the possibilities listed so I answer "Yes",

On the screen "Did you stop using this asset in 2021?" you will of course, answer YES.

On the Special handling required?" screen, you must click NO. If you select yes, you will never be asked for sales information.

Does one of the options on the "Special Handling Required?" screen apply to you, meaning you would click yes?

[Carl]

That takes me to the next page and the only two questions on that page are: Date of Sale or Disposition and Date Acquired.

Correct. Enter the requested information and continue. I would expect the date acquired to already be filled in with either the date you purchased it, or the date you placed the property in service. So the only data you enter on that screen, is the date you closed on the sale. Then continue. Note that you "MUST" have selected NO on the "Special Handling Required" screen earlier in the interview.

[adamtoth]

For anyone else confused by the Special Handling Required option for a rental, it's worded very poorly:

-This asset was a rental, a home office, or a home office improvement within a home.

Notice the bold area - I think this is intended to indicate that this is concerning a part of your main home that was used as a rental (maybe a garage/shop, seperate dwelling unit on the property, etc), not an entire property that was a rental. If you are selling a full rental property, this would not apply to you, so you should select NO, which then enables you to enter the sale information.

What I'm still confused on is the COST OF LAND section for the rental property asset - do I put the original cost of the land when first acquired, or the appraised value of the land at the date the property was converted from primary residence to a rental? If I bought my property in 2000, lived in it for 10 years, and then converted to a rental in 2010, surely the land value increased, and I would want the depreciation calculated from that point forward on the adjusted cost-basis minus the larger more-recent land value, correct?

[DaveF1006]

Actually this is a non-issue because land is never depreciated. As far as entering what basis to report for the building, your basis for depreciation is the lower of the Fair Market Value or Adjusted Basis on the date of the conversion. For the land, you will use the same formula.

Although land is never depreciated, the basis will be used, if you ever sell this property, to determine the ordinary gain or loss on the land portion of the property. 

@adamtoth

[Linda2905]

Carl, your responses are great!  I wish I found them sooner.  I really messed up on the step of reporting the sale of each property asset (ie, fence, windows, etc).  I'm now afraid I have hopelessly garbled this section and would like to start again with a clean slate for the rental property section without totally starting over with all sections of my return.  Do you know if I can do that or do I simply need to create a new return and reenter all the data in my return?  

Your help is much appreciated.