How to enter sale of a rental investment property in TurboTax?

[sunnyanand2]

Hello, I sold the rental property last year on 05/1/2019 for $670,000. The expense was $22,180 (including all the eligible expenses). On the sales information screen, should I spilt up asset sales price and land sales price? If so, should I take the % of house vs land based on the cost basis?

For cost basis, I bought the property on 1/4/2006. Cost - $645,900, and cost of land - $218, 300. I converted the house to rental property on 01/01/2008, should I use the market place price for cost basis at that time? I have about $15K in depreciation. Thanks for your help!!

[Anonymous]

On the sales information screen, should I spilt up asset sales price and land sales price? If so, should I take the % of house vs land based on the cost basis?

For cost basis, I bought the property on 1/4/2006. Cost - $645,900, and cost of land - $218, 300. I converted the house to rental property on 01/01/2008, should I use the market place price for cost basis at that time?

yes you need to split up the sales proceeds and the sales cost between thee building and land.  Technically based on their relative FMV on the date of sale.     Use cost basis when you purchased. depreciation is subject to recapture

[Carl]

Please read the below guidance to help you avoid the headaches that will occur if you don't follow the guidance.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

[tagteam · Accepted solution]

If the property was sold at a gain, the basis is the original cost plus amounts paid for capital improvements, less depreciation taken.

If the property was sold at a loss, the starting point is the lower of the property’s adjusted cost basis or fair market value when it was converted to rental property (Regs. Sec. 1.165-9(b)(2)).

[GoinBroke]

The reply (answer) in a 2020 posting on the Subject stated that "If you sold a rental property at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1."  My question is ... I don't understand why, since all the asset Gains and Losses add together on Form 4797, Page 1. 

I sold the property for a Gain.  If I disposition each of the assets with a sales value of $0 or $1, I get a loss for each that have a remaining basis to depreciate.  This was actually the recommended answer to previous questions submitted to TT.

The only way to obtain no Gain or Loss ($0) is to enter the exact difference between the Cost (Depreciable) Basis and the Total Depreciation at the time of sale.   This is what I did on my 2021 return yet to be filed under an extension.

Example:  Asset Cost (Depreciable) Basis $4,000 minus Prior Depreciation $2000 minus Current Depreciation $100 equals $1900.  Enter $1900 as this Assets Sale Price and you get $0 Gain/Loss.

If it needs to be a gain of $1, then I would need to enter this difference plus $1, i.e. $1901.

Does anyone know the correct (or IRS acceptable) approach?

Happy to make it a Gain of $1 if it keeps me in the good graces of the IRS.

Thanks!

[Critter-3]

You should total all the asset basis and use a ratio of the individual asset to the total when you sell off the entire property.  Use the same ratio for the sales price and the cost of sale.  And the reason you need to sell off all the assets using the correct ratio (not just $1) is because the land, home and other assets like appliances & furniture have different depreciation recovery methods.  Figuring ratios was something you were taught in grade school  so get out a calculator, excel worksheet  or even just a pencil & paper and do some simple figuring.  

ALL the assets listed for depreciation need to be sold so you need to allocate the sale price & costs of sale over all of them.  You need to  make yourself a table so you have all the info needed when the program asks for it since the program  will not do the allocation  for you.

 A simple allocation example using 100,000 of assets  and a sale price of 200,000 and cost of sale of 20,000 : 

assets              original basis             % of total basis      sales price     cost of sale

house             70,000                          70%                         140,000          14,000

land                20,000                           20%                            40,000           4000

appliances    10,000                           10%                             20,000           2000

 totals            100,000                         100%                         200,000         20,000

[GoinBroke]

That doesn't work, as the additional assets were added throughout the 22-year service life of the property before it was sold.  Since the net result is a gain regardless of each assets sale price, I simply used the residual unused depreciation as the sale price for each asset to yield a $0 gain/loss.  The IRS can provide a different approach if they don't like it.  BTW, I am an engineer with advance math skills so simple math like figuring ratios isn't the problem, it is the usual lack of clear guidance in the tax code and instructions, leaving the process up for interpretation.  I tend to interpret it in my favor.

[Critter-3]

Do what you want and if the IRS audits your return you can explain how you did it  or  you can read the form 4797 instructions which I simplified in my example.  https://www.irs.gov/forms-pubs/about-form-4797   Your choice.

[GoinBroke]

This is why I have trouble with just applying a ratio of the gain.  In my case, I have had the property 22 years, and say for simplicity it was purchased for $100,000 (House $70,000, Land $30,000).  Now, I put a new roof on one garage 2 years after purchase for a cost of $5000, so 20 years later it has (been) depreciated ~70%.  Then, I put a new roof on another separate garage 2 years ago for a cost of $10,000, so it has only (been) depreciated ~10%.  Let's say I sold the property for $500,000 and I simply assume that the cost basis for the property is $115,000 (House, Land, Garage Roofs).  Here is the ratio table:

Assets Original Basis % of Total Basis Sales Price Cost of Sale

Assets	Original Basis	% of Total Basis	Sales Price	Cost of Sale
House	$          70,000	61%	$      304,348	$         3,043
Land	$          30,000	26%	$      130,435	$         1,304
Roof	$            5,000	4%	$        21,739	$            217
Roof	$          10,000	9%	$        43,478	$            435
Totals	$        115,000	100%	$      500,000	$         5,000

This would say that the roof I just replaced 2 years ago is now worth over $40,000 (and the one replaced 20 years ago is now worth over $20,000 when I can actually replace it for around $10,000).  I know the most recent roof is not worth $40,000, particularly given it cost me only $10,000 2 years earlier.   I understand that the House that had a cost basis of $70,000 is now $300,000 plus and it was also depreciated for 22 years.   It just doesn't seem logical when assets were added throughout the service life to increase their value proportionally to their cost basis.   BTW, if you look at the current property tax assessment for reference, it is the land that has appreciated the most with the house only appreciating maybe 3x (vs 5x).

I'll read Form 4797 Instructions again but doubt I will understand it to the degree that it will guide me in a reasonable process.  If you want to point me to the sections and paragraph that apply, or copy/paste them here that would be great.  It would be nice if the IRS gave a simple example as you did.

BTW, I asked a Tax Specialist, and they said you can do it anyway you want.  Their tax software added it all together, so they didn't disposition each asset individually like TT does, so they had never seen that before.

[tagteam]

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@GoinBroke wrote:

BTW, I asked a Tax Specialist, and they said you can do it anyway you want.  Their tax software added it all together.....

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Which is pretty much standard and you can do the same with TurboTax. You simply have to add the basis of each asset (to get the total) and the total accumulated depreciation.

[Critter-3]

All of the 1245assets can be added together if you wish and all of the 1250 assets can be added together  and leave the land separate ... by doing so you would fill in the correct sections of the  form 4797 correctly.  And using my method will get them put in the correct sections even though you don't like how the roof looks ... all 1250 property will balance out automatically.

FYI ... I am an Enrolled Agent with the IRS and I taught this tax course for several years  so I know the correct way to do this  however many others do it differently  and  if it will hold up in an IRS audit is iffy at best.  

[GoinBroke]

Well, now where getting somewhere.  Speaking with an Enrolled Agent certainly makes a difference for me because it is understanding the tax laws that I care about.  Once I know the law then the math is simple.  It is unfortunate that the certified Tax Specialist I have spoken with locally don't provide consistent answers.

Land is separate, but seems TT needs to disposition each asset individually and I see no way to add everything together, as the Tax Specialist I spoke with did with their software.

A few questions if I may.

(1) given all of the assets are related to the real property, is there any Section 1245?  Example, is the roof 1250 but an appliance is 1245?  Since they are all an integral part of the property when purchased and sold it would seem as if they were all 1250.  I didn't really sell them separately.

(2) Is this course material available through the IRS?

So, 4797 speaks to Fair Market Value (FMV) when dispositioning property and allocating realized gains.  Let me complicate the example somewhat. The FMV of the building and land at the time of purchase was 70/30 or $70,000/$30,000, respectively.  This is what was used in the ratio example.  Today, however, the FMV for the building and land at the time of sale was 40/60 or $200,000/$300,000.  So, the building has appreciated less than 3x while the land has appreciated 10x.  This is based on the Property Tax Assessments 22 years ago (at the time of purchase) and now (at the time of sale).

A few questions.

(1) Can I use the current FMV ratio for Building (including Assets) and Land?  This would be more gain for the land and less for the building.

(2) If this makes sense, is reasonable and acceptable, then how would I disposition (distribute) the gain to among the Building and Assets.  This is kind of why I took the original approach I did.

Thanks!

[GoinBroke]

Thanks, but I still don't see (know) how to do this if TT walks you through every asset individually and populates many rows and columns in the form over multiple pages.  I try not to work around TT step-by-step process unless absolutely necessary. 

[Critter-3]

First you should use the ratio land to property value you used when you put the asset in service even if you don't like it ... the profits on the  land and bldg are both taxed  the same way in the end so don't let the figures startle you. 

Preferred method is to simply sell each and every asset in the program ... complete an excel worksheet to get the figures you need ... the program only needs 3 ... date of sale, % of sales price & % of cost of sale.  The land should have been listed as a part of  the original property cost and will be handled the same when you sell it.  

The other option would be to take each and every asset out of service in the Sch E asset section.  Then print a copy of the depreciation worksheet and use that to combine all of the like code assets together and enter it later in the interview  under sales of business assets. 

Neither option is fast but they are both doable ... your choice as to which one you use. 

[GoinBroke]

Originally, I simply put the sale price of each depreciated asset at its remaining allowed depreciation, which basically made the gain of each asset zero.  I subtracted the total of these from the sale price proportioned to the building that was part of the original purchase. This basically put all of the gain on the originally purchase building and nothing against the asset add throughout the rental life.

It was recommended that I create a spread sheet to allocate the sale price to each asset, including the building, based on a ratio of their individual cost basis to the total cost basis.  I did this and the Unrecaptured 1250 Gain increased, even though the total gain on depreciated assets (building and added assets) is the same.  Why would the Unrecaptured 1250 can change?

It was also recommended in a separate discussion to not allocate a sale price to any of the depreciated assets and somehow just handle it on Form 4797.  Is there an easy way to do this without allocating a sale price to each added asset?