I have a rental property that I sold. I lived in the property from 5/2019-12/2021, I rented it starting 1/2021 and sold it 8/2024. Should it be sale of business or home?

[natalierose28]

I know I shouldn't be paying any capital gains taxes. I'm struggling to figure out whether it should be listed as Sale of business property OR sale of primary residence. I also need guidance on what should be included in the calculations. Thank you for your help!

[pk]

@natalierose28 , unless you are quite familiar with and ready to use  a higher version like  Windows download/CD   Home and Business, you are probably safer to use  a tax professional.

What you will need to do :

(a) first   tell TurboTax that you have sole an income property -- note this is in addition to Schedule-E where you are recognizing the rental income/ expenses/ depreciation etc.

(b)  while doing the  4797 you have to make sure that  you include any suspended ,losses  associated with  Schedule-E.

(c) After the   gain has been computed,  gain upto accumulated depreciation would show up on your  1040 as  ordinary income.  The rest of the gain would show up on Schedule D .

(d) On Schedule-D  you can now exclude  250,000 ( 500,000 for joint filing )  -- assuming you have met the  2 year ownership plus  730 days of primary use ( by both if joint ).

 It is not straight forward.  But the savings  is worth it.

Is there more I can do for you

[natalierose28]

My understanding is that turbotax has the capabilities to achieve this. I just need guidance on what to click. You mentioned several forms but it would be helpful to have instructions on how to achieve this using turbotax. thank you!

[pk]

@natalierose28 ,  sure.  Can walk you through the screens  ( assuming that you are on Windows TurboTax  -- I am on Home & Business and so my screens should be pretty similar.

Give me your details ---  Date of purchase/ acquisition;  Date of Sale ;   Acquisition Price;  Sales Price;  Date of con version to Rental,  approximate  cost of land under the house;  Date of Sale etc.   Note that the dollar figures  can by dummy ones  ( generally in the range  of actual ); your own filing status  ( single or joint).

Once I hear from you I will create the scenario and then walk you through screen by screen  ( approx. and important ones ).

Waiting to hear from you --yes ?

[natalierose28]

Thank you! 

Let's use these number: 

Date of purchase/ acquisition; 5/28/2019  

Date of Sale ;   8/19/2024

Acquisition Price; 316,000

Sales Price; 450,000

Date of con version to Rental: 1/1/2022

approximate cost of land under the house; land is about 31% of total 

 your own filing status: head of household, sole owner 

[pk]

@natalierose28 , thank you for the answers.  Let me work on this -- will get back in a while

[pk]

@natalierose28 , I have not forgotten your case --- I am working  on it and  having issues  with how TurboTax is handling the situation  ( perhaps  I have missed some question in the process of cycling  between step-by-step and forms mode ). Please give me a little bit more time -- perhaps till tomorrow afternoon ( PT).  Please excuse  the delay 

pk

[AmeliesUncle]

It is possible the program has changed since I last checked, but this is how it should be done (at least how it was done):

1. Go into the rental section and in the first introductory part, indicate it was sold.
2. Then go into EACH asset/depreciation item and go through it and check another box it was sold.  When you get to the "Special Handling" screen, in most cases you will say "No".  Then it will ask for the sales information and one of those questions will ask if it was ever your Main Home.  Answer "yest" to the Main Home questions and all of the followup questions, and it should report it correctly.

You will still pay tax on the gain due to the depreciation that you eligible to take.

[pk]

@natalierose28 , agreeing with the suggestions from my colleague @AmeliesUncle , here is my conclusion and it is actually easier  than my earlier suggestion:

(a)  per @AmeliesUncle 's suggestion do the rental income -- Schedule as usual.  It will include any allowable depreciation based on MACRS for your property  ( it will probably also show you any suspended losses   and accumulated depreciation).  Keep these figures handy. 

(b) go the personal income section , choose " I will choose what I work on  ". Then when all done with W-2 etc. and near the bottom you will see the  "sale of home".   Select this 

(c) Enter all the details as if you sold  your main home  ( of course the address etc. will be the actually sold property.  Note that  Under the  Sales  Price, include all the  "Sales Expenses   (viz.  commission, title search/insurance, transfer tax, any improvements/repairs you did  explicitly to get the place ready for sale  etc. ) as a negative number -- I would use a back-up/explanatory sheet for this -- the total will transfer to the form.   If I  remember right, a few screens later , under  "special..." it asks for if you used the property for anything else  --  want the exact number of days the  property was  used as rental.  Next screen it asks for  depreciation you have taken -- here  provide  the accumulated  depreciation including the current year.

(d) This will result in   Schedule-D computation, including recapture of the  allowable depreciation  ( taxed as ordinary gain/income ) exclusion for sale of main home etc.

This works.

 Is there more I can do for you ?

Sorry for the long   time  ( I was having a hard time  verifying the  results of the Schedule-D tax computation  ---- it is  done differently  than I would have done  but it does work -- just more convoluted IMHO) it took.

pk

[AmeliesUncle]

---

@pk wrote:

(b) go the personal income section , choose " I will choose what I work on  ". Then when all done with W-2 etc. and near the bottom you will see the  "sale of home".   Select this 

---

Does it not ask the question in the rental asset section anymore?  After saying the asset was sold and saying "no" to the Special Handling screen, it used to ask if it was ever your Main Home.  Does it not ask that anymore?

[pk]

@AmeliesUncle , I did not see that under business income-expenses section.  

pk

[AmeliesUncle]

It was when you go into the specific "asset" for depreciation.  While in that asset, you need to say that it was converted to personal use (that will stop depreciation).  When continuing on through the questions about that asset (after saying it was converted to personal use), one of the questioned asked if it used to be your Main Home (I think it was shortly after the Special Handling screen).

[natalierose28]

Hi both, thank you for all this help. I have a few follow up questions. 

Section: Tell us about this Rental Asset

Cost - should this be the full cost of the property? 316,000? OR Cost minus the land portion?

Land - assuming I should take this from the tax records?

Depreciation: Can you say more about this please? I should be paying capital gains taxes on the full amount that was depreciated? So if for example 16K was depreciated in prior years and another 4K this year then I would have to pay capital gains taxes on 20K? 

Section: Sales Information - if I assume 70% is property and 30% is land is the calc below correct?

Asset Sales Price : 450K sales price * 70%

Asset Sales Expense: should this exclude the mortgage? so just show legal fees etc. of 27K * 70%

Land Sales Price 450K sales price * 30%

Land Sales Expense: 27K * 30%

If this is the case how does it factor in the mortgage that was paid off? 

When I enter all that information under the rental property it shows a depreciation amount of 4,949 and says I will have to pay capital gains on 129K which I know is not correct. 

When I go back to Wages and Income I now see two sections under the rental section 1) Sale of business property which shows 20K - I'm guessing this is the depreciation amount. and 2) Sale of Home which shows the 129K. 

Sale of Home: When I click through here It leads me to a screen that says 

Good news! You don't have to pay any income tax on this sale of your home because your gain of $108,069 was less than the maximum allowed of $250,000.

but when I hit continue and get back to the main Wages and Income  page it still shows 129K.

Should my taxes show both sale of business property AND sale of home for the same property sold? Is it being double counted?

Thank you for all your help! 

[pk]

@natalierose28 

Section: Tell us about this Rental Asset

Cost - should this be the full cost of the property? 316,000? OR Cost minus the land portion?

Land - assuming I should take this from the tax records?

The cost of the asset is total cost of acquisition + plus cost of any improvements.  This is probably the 316,000 that you paid ( House & the land underneath ).

Depreciation: Can you say more about this please? I should be paying capital gains taxes on the full amount that was depreciated? So if for example 16K was depreciated in prior years and another 4K this year then I would have to pay capital gains taxes on 20K? 

For income property  there is allowable depreciation over the period of usage as income property.  For your case, TurboTax will compute  ( or from the  carry over  worksheet )  the accumulated and allowable depreciation. On Schedule E you will also see an amount od depreciation based  MACRS convention applicable.  The sum of these two is your total depreciation for purposes of gain/ loss  computation.

 That portion of gain caused by  depreciation ( total/accumulated ) is taxed as ordinary income -- see Schedule-D Tax worksheet.  The rest of the gain is eligible for  Capital tax treatment ( or exclusion when one is eligible -- the  2 + 2 rule with five year look back etc.  )  .

 Once you have  gone past these points , go to forms mode and take a look at  forms 1040- , Schedule-1,  Schedule-D ( tax calculation worksheet ) and make sure that this is in sync. with what should happen.

If what you have done is just entered the sale ONLY as a sale of home ( under personal income tab ), then the sale of the property should appear ONLY once of Schedule-D.  You should also see the  1040 also reflect that.  Note there  are two 1040 --- 1040/ 1040 SR is the  enterable kind of work sheet and the  1040 it self is  the final  one -- not editable.

Note that when you check the  sale of home / Schedule -D worksheet ( not the tax computation worksheet ) ,  when yolu hove over an editable entry, you should see a magnifying glass show up. Click that and it should open  a back-up sheet for that entry --  here for example you can  enter  list your sales price  and   as negative all the  expenses you had associated with the sales transaction (  such as commission , preparing the house for sale cost,  title/deed expenses,/ transfer tax etc. etc.).  This will transfer to the form correctly and  will be  a memory aid if you are challenged.

Does this help ?    Have I answered all your  questions/worries ?

[natalierose28]

No sorry that doesn't answer my questions. You are referring to specific tax forms. As I mentioned above I can't see any tax forms all I can see if the prompts in TurboTax to which I still have questions. @AmeliesUncle can you take a look at the questions I have please? You seem to be very familiar with turbotax. Thank you!